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MERCANTILE  CREDIT 


BY 

JAMES  EDWARD  HAGERTY,  Ph.  D. 

OHIO  STATE   UNIVERSITY 


NEW  YORK 

HENRY  HOLT  AND  COMPANY 


ms&s 


Copyright,  1913 

BY 

Henry  Holt  and  Company 


HF 

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PREFACE 

This  volume  represents  an  attempt  to  discuss  one 
branch  of  the  credit  family,  Mercantile  Credit.  The 
theory  of  credit,  and  the  different  kinds  of  credit  are 
considered  only  in  so  far  as  the  treatment  of  these  sub- 
jects makes  more  clear  the  nature,  scope,  and  functions 
of  mercantile  credit.  Bankruptcy  legislation  has  to  do 
largely  with  those  who  give  and  those  who  receive  mer- 
cantile loans,  and  for  this  reason  it  has  been  considered 
of  sufficient  importance  to  warrant  treatment. 

While  treating  mercantile  credit  from  a  theoretical 
standpoint,  an  attempt  is  made  to  view  the  problems  of 
mercantile  credit  as  far  as  possible  as  a  business  man 
would  view  them.  For  this  reason  the  author  has  de- 
scribed with  much  detail  the  work  of  the  credit  man,  the 
organization  of  his  office,  the  sources  of  credit  information, 
the  forms  he  uses  to  secure  this  information,  and  the 
principles  which  govern  him  in  the  granting  of  credit. 
He  also  discusses  at  considerable  length  the  development 
of  legislation  with  reference  to  credit,  and  the  attitude  of 
credit  men  toward  this  legislation. 

Since  economic  phenomena  should  be  viewed  in  the 
same  way  as  phenomena  in  any  other  science,  it  is  the 
first  task  of  the  economist  to  state  clearly  and  to  describe 
accurately  the  facts  which  come  within  the  scope  of  his 

v 


vi  PREFACE 

investigation  and  then  interpret  them  in  the  light  of 
economic  knowledge.  In  this  volume  the  author  has  at- 
tempted to  do  this. 

This  book  is  intended  primarily  for  students  in  the 
colleges  or  schools  of  commerce,  for  those  engaged  in  the 
many  phases  of  credit  work,  and  also  for  those  who  are 
interested  in  the  general  subject  of  credit. 

Chapters  IV,  VI,  VIII  and  XIV  were  published  in 

whole  or  in  part  in  the  American  Journal  of  Accountancy, 

and  acknowledgement  is  made  to  the  editors  of  this 

magazine  for  their  courtesy  in  permitting  the  use  of  the 

material  of  these  chapters  in  this  volume.     The  writer 

acknowledges  his  indebtedness  to  his  colleagues  in  the 

Department  of  Economics  and  Sociology  of  the   Ohio 

State  University  for  helpful  criticisms,    and   especially 

to  Mr.  B.  G.  Watson,  the  secretary  of  the  Columbus 

Credit  Men's  Association,  who  read  several  chapters  of 

the  manuscript  and  offered  many  helpful  suggestions. 

James  Edward  Hagerty. 
Ohio  State  Univeesity,  Columbus,  Ohio. 
June,  1913. 


CONTENTS 

PART  I 

Origin,  Development  and  Present  Status  of 
Mercantile  Credit 

CHAPTER  I 
Theory  and  History  of  Credit 

Page 
Definition  of  Credit,  Credit  Transaction  and  Credit  System — 
Credit  and  the  three  periods  of  economic  development 
— Credit  in  Rome — The  Code  of  the  XII  tables — Credit 
in  Babylon — Credit  and  the  Great  Fairs — Medium  of  Ex- 
change— Function  of  credit — Credit  of  General  Accepta- 
bility and  credit  of  Limited  Acceptability — Credit  instru- 
ments— Essential  characteristics  of  Credit — Confidence 
as  a  basis  of  loans — Relation  between  credit,  money  and 
goods — What  limits  the  amount  of  credit — Credit  not 
Wealth  or  Capital 3 

CHAPTER  II 

Credit  Instruments 

Two  classes  of  credit  instruments,  (1)  Promises  to  pay  and 
(2)  orders  to  pay — Definition  and  uses  of  Promissory 
Notes,  Bank  notes  ,  book  accounts,  stock  certificates, 
bonds,  checks — The  travelers  check,  letters  of  credit,  Post 
office  Money  orders,  bank  drafts,  Bills  of  Exchange,  Drafts, 
Bills  of  lading  and  warehouse  receipts 19 

CHAPTER  III 
Kinds  of  Credit 

Different  classifications  of  credit — Banking  credit — Functions 
of   modern   banks — Credit   creation — Relation   between 
vii 


viii  CONTENTS 

Page 

banking  and  mercantile  credit  and  between  banking  and 
personal  credit — Setting  of  credit  standards — Accommo- 
dation paper — Loans  on  collateral — Credit  departments. 

Public  credit:  Floating  loans — Paper  money — Causes  of  Pub- 
lic Debts. 

Investment  credit:  Its  extent — Stocks  and  Bonds — Invest- 
ments and  Public  Credit — Investment  and  mercantile 
credit — Kinds  of  investment  credit 37 

CHAPTER  IV 

Mercantile  Credit 

Dependence  of  mercantile  on  banking  credit — Who  receive 
mercantile  credit — Changes  in  granting  mercantile  credit 
— Sources  of  credit  information — Terms  of  credit — Rates 
of  discount — Mercantile  rates  of  interest  high — Credit  in- 
struments— Note  brokers — Book  accounts — Methods  of 
lending  on  book  accounts — Dating  ahead  and  its  in- 
fluence on  credit 54 

CHAPTER  V 

Personal  Credit 

Definition — Personal  and  mercantile  credit  compared — 
Personal  and  banking  credit  compared — Changes  in  giv- 
ing personal  credit — Classes  that  receive  personal  credit — 
Mercantile  houses  which  give  personal  credit — Factors 
determining  the  granting  of  credit  by  retailers — Granting 
of  credit  and  extravagance — Credit  given  by  company 
stores  and  installment  houses — The  consumer  bears  the 
burden  of  unwise  credit 75 

CHAPTER  VI 

The  Credit  Man 

The  organization  of  mercantile  industry — The  work  of  the 
credit  man — Sources  of  information — Character  of  the 
knowledge  the  credit  man  should  possess — Book-keeping 
and  credit — Bank  and  mercantile  credit — The  signed 
statement — Importance  of  work  of  credit  man 90 


CONTENTS  ix 

Page 

CHAPTER  VII 

Credit  Office 

Purposes  of  system — A  typical  system — Wherein  office  sys- 
tems differ — Credit  inquiry  forms — Property  statements 
— Property  forms — Traveling  salesmen  and  local  attor- 
neys as  sources  of  credit  information — Comparative  prop- 
erty statement  forms — Credit  limitations — Credit  depart- 
ments of  banks 108 

CHAPTER  VIII 

Sources  of  Credit  Information 

mercantile  agencies 

'  What  the  agency  does — Industrial  conditions  responsible  for 
the  agency — Failure  of  early  methods  of  granting  credit — 
Origin  of  agencies — Development  of  agencies — Organiza- 
tion of  agencies — Control  of  territory  by  district  offices — 
Organization  of  foreign  offices — Methods  of  securing  credit 
information — Classifying,  filing  and  distributing  informa- 
tion— Magazines  of  the  agency — Value  of  the  agencies.     .   134 

CHAPTER  IX 

Sources  of  Credit  Information 

general  sources 

Salesmen:  Differences  between  salesman  and  credit  man — 
Salesman  as  collector — Inquiry  blanks — Attorneys — 
Method  of  securing  information  from  attorneys — Banks, 
kind  of  information  obtained  from  them — Traveling 
credit  representatives — Methods  by  which  they  secure 
credit  information 158 

CHAPTER  X 

Sources  of  Credit  Information 

credit  exchange 

Credit  exchanges  developed  in  last  15  years — Exchange  of 
ledger  information — The  New  Orleans  an<l  Minneapolis 


x  CONTENTS 

Paob 

systems — Two  classes  of  bureaus  to-day — The  card  index 
system — The  credit  report  system — Credit  exchange 
bureaus  of  retail  merchants  associations — Retail  grocers 
credit  exchange  bureaus 170 

CHAPTER  XI 

Adjustment  Bureaus 

Origin  of  adjustment  bureaus  and  their  aims — Value  of  adjust- 
ment bureaus — Ordinary  methods  of  closing  estates — 
How  estates  are  closed  by  adjustment  bureaus — Plan  of 
organization — Three  methods  of  organization — Relation 
of  National  Association  of  Credit  Men  to  bureaus — In- 
come from  adjustment  bureaus — Costs  of  closing  estates 
by  adjustment  bureaus — Distribution  of  bureaus — Con- 
clusions reached  at  conference  of  adjustment  bureaus 
managers 184 

CHAPTER  XII 

Collections 

Relation  of  collections  to  a  credit  department — Qualifications 
of  a  collector — Office  system  in  retail  methods  of  collect- 
ing accounts — Classes  of  accounts — Methods  of  collecting 
accounts 200 

CHAPTER  XIII 

Mercantile  Credits  and  Depressions 

Channels  of  distribution — Methods  of  giving  mercantile  credit 
— Over-trading — Influence  of  rising  and  falling  prices  on 
credit — A  cause  of  the  crisis  of  1893 — Number  and  extent 
of  mercantile  institutions — Changes  in  the  character  of 
commodities  produced 211 

CHAPTER  XIV 

Credit  Men's  Association 

History  of  National  Association  of  Credit  Men — Its  origin — 
Purposes — Membership — Difference  in  work  of  national 


CONTENTS  xi 

Paqb 
and  local  associations — Work  of  committees — Co-opera- 
tion of  National  and  local  associations  in  having  State 
laws    passed — Local  associations  of  credit    men — Their 
purposes  and  methods 225 

PART  II 

Legislation 

CHAPTER  XV 

Bankruptcy  Legislation 

Contracts  of  primitive  peoples — Early  legislation  with  refer- 
ence to  debts — Modern  views  with  reference  to  the  rela- 
tions between  debtors  and  creditors — Modern  States  regu- 
late relations  between  debtors  and  creditors — Insolvency, 
simple  bankruptcy,  and  fraudulent  bankruptcy — Bank- 
ruptcy proceedings — Preventive  compositions — Treat- 
ment of  bankrupts  in  different  countries 247 

CHAPTER  XVI 

The  Bankrupt  Law  op  1800 

National  bankrupt  laws — Right  of  National  Government  to 
legislate  on  bankruptcy — Principles  in  bankruptcy  legisla- 
tion of  progressive  countries — Law  of  1800  limited  to 
traders — Blackstone's  views  on  bankruptcy — Who  could 
be  declared  bankrupts  under  law  of  1800 — Bankruptcy 
proceedings — Amount  of  property  allowed  a  bankrupt — 
Reasons  for  retaining  the  law — Why  the  law  was  repealed.  257 

CHAPTER  XVII 

Bankruptcy  Act  of  1841 

Proposed  bankruptcy  acts  and  what  they  aimed  to  accomplish 
— Why  traders  made  a  special  class — Foreign  experience 
— New  York's  insolent  laws — Purposes  of  a  bankrupt  law 
— Supreme  Courts  decisions  on  bankrupt  and  insolvent 
laws — Crisis  of  1837 — Provisions  of  Act  of  1841 — Volun- 


xii  CONTENTS 

Paqb 
tary  bankruptcy — Involuntary  bankruptcy — Preferences 
and   penalties  for   them — Assignees   and  their  duties — 
Courts  having  jurisdiction — Strength  of  law — Reasons 
for  its  repeal 273 

CHAPTER  XVIII 

Bankruptcy  Act  of  1867 

Agitation  for  a  third  bankrupt  law — Law  of  1867  a  compromise 
measure — Administration  of  the  law — Attempt  to  make 
the  courts  accessible  to  the  people — Registers  appointed 
by  district  judges  when  recommended  by  the  Chief  Justice 
of  the  United  States — Voluntary  bankruptcy — Selection 
of  assignees  and  their  duties — Discharge — Involuntary 
bankruptcy — Control  of  debtor's  estate  by  creditors — 
Defects  of  the  Act  of  1867— The  Amendments  of  1870  and 
1874 — Repeal  of  the  law  and  why  it  was  a  failure.       .    .    .  293 

CHAPTER  XIX 

Bankruptcy  Act  op  1898 

Conventions  to  formulate  a  bankruptcy  law — Purposes  of  pro- 
posed measure — Act  which  passed  was  a  compromise 
measure — The  five  acts  which  either  make  a  debtor  a  bank- 
rupt or  which  give  grounds  for  bankruptcy  proceedings — 
What  a  bankrupt  is  required  to  do — His  privileges — A 
county  the  administrative  unit — Trustees,  their  duties 
and  compensation — Debts  which  have  priority — Interests 
of  debtors  and  creditors  contrasted — Elements  of  strength 
in  the  law — Its  weak  features — Advantages  of  a  good 
voluntary  law — Amendments  of  1903  and  1910 — Composi- 
tions— Corporations  may  become  voluntary  as  well  as 
involuntary  bankrupts — Attempts  to  repeal  law  of  1898 — 
Advantages  of  a  National  bankrupt  act 316 

CHAPTER  XX 

State  Insolvency  Legislation 

Bankruptcy  and  the  constitution — Why  State  insolvency  laws 
are  inadequate — Voluntary  and  involuntary  insolvency 


CONTENTS  xiii 

Pass 

laws — Methods  of  procedure  in  each  case — Voluntary 
insolvency  in  Utah  and  Oklahoma — Conditions  of  dis- 
charge in  different  states — Bankruptcy  in  New  England — 
Insolvent  laws  in  Texas,  Georgia,  and  Lousiana 345 

CHAPTER  XXI 
Laws  Regulating  the  Sale  of  Goods  in  Bulk 

Bulk  sales'  laws  passed  as  a  result  of  systematic  campaign — 
Chief  abuse  which  bulk  sales'  laws  correct — Provisions  of 
model  law — Louisiana  bulk  sales'  law  drastic  in  character 
— What  most  bulk  sales'  laws  require — Bulk  sales'  laws  of 
Oregon,  Connecticut,  and  South  Carolina — Acta  passed 
by  Nebraska,  North  Carolina,  and  Nevada  in  1907  intro- 
duce new  features — Some  laws  declared  unconstitutional 
— In  most  instances  Supreme  Court  decisions  sustain  bulk 
sales'  laws  as  constitutional 357 

Index 370 


PART  I 

ORIGIN,  DEVELOPMENT  AND  PRESENT 
STATUS  OF  MERCANTILE  CREDIT 


CHAPTER  I 
THEORY  AND  HISTORY  OF  CREDIT 

No  economic  term  has  been  given  a  greater  variety 
of  meanings,  even  by  economic  writers,  than  the  term 
credit.  This  fact  makes  it  important  at  the  beginning  of 
an  economic  study  to  state  clearly  the  meaning  which 
the  term  is  intended  to  convey.  For  purposes  of  the 
present  discussion,  credit  means  "the  power  to 
secure  commodities  or  services  at  the  present  . 

time  in  return  for  some  equivalent  promised 
at  a  future  time."1  Closely  allied  to  the  meaning  of 
credit  is  a  credit  transaction  which  is  "a  transfer  of 
goods,  services,  or  money,  for  a  future  equivalent."2 
The  credit  system  may  be  defined  as  the  great  variety 
of  means  by  "which  transactions  in  credit  are  conducted, 
and  the  tremendous  volume  of  debts  and  credits  are 
brought  into  being,  passed  from  hand  to  hand  in  the 
routine  of  business,  and  finally  liquidated."0 

In  the  business  world  a  man  has  good  credit  if  he 
always  pays  his  debts  when  due.     To  the  bookkeeper 
credit  means  that  something  is  owed  on  an  account. 
Credit  is  given  people  in  general  when  they  do  some- 

1  C.  T.  Bullock:  Introduction  to  the  Study  of  Economics. 

2  Ely:  Outlines  of  Economics. 

3  Prendergast :  Credit  and  Its  Uses. 

4  Johnson;  Money  and  Currency. 

3 


4  MERCANTILE  CREDIT 

thing  upon  which  society  places  a  favorable  estimate. 
Among  the  economists  we  also  find  a  variety  of  defini- 
tions: Mill  defines  credit  as  "the  permission  to  use 
another's  capital."  Macleod  defines  it  as  "the  present 
right  to  a  future  payment."  Fawcett  defines  it  as  "the 
power  to  borrow  money."  Laughlin  defines  it  as 
"machinery  invented  to  aid  in  accomplishing  the  pur- 
poses of  capital."  The  differences  of  opinion  among  the 
economists  as  suggested  by  these  definitions  are  more 
apparent  than  real,  for  their  discussions  of  credit  show 
them  to  be  at  variance  only  on  minor  matters,  and  these 
come  into  the  foreground  only  when  the  author  attempts 
to  establish  certain  theories  with  reference  to  the  impli- 
cations of  credit. 

Professor   Hildebrand,   one   of  the   founders   of   the 
German  Historical  School  of  Political  Economy,  in  treat- 
ing of   economic  evolution,   says  that  credit 
^Tiere 
credit  an-     comes  relatively  late  in  economic  development. 

pears  in  His  three  periods  are  those  of  natural  econ- 
economic  omy,  money  economy  and  credit  economy, 
eve  op-  jn  ^e  grg^  pe0pie  consumed  what  they  pro- 
duced; or  where  exchange  occurred,  it  took 
the  form  of  barter.  In  the  second  stage,  money  econ- 
omy, exchange  played  an  important  role  in  economic 
life  and  money  as  a  medium  of  exchange  facilitated 
the  selling  and  buying  of  goods.  The  third  period 
of  credit  economy  was  characterized  by  deferred 
payments,  loans,  etc. 

It  cannot  be  maintained  that  each  of  these  periods 
existed  exclusively  of  the  others.     From  the  point  of 


THEORY  AND  HISTORY  OF  CREDIT         5 

view  of  historical  development  there  may  be  an  ad- 
vantage in  considering  these  periods  as  emphasizing  a 
certain  class  of  phenomena.  Among  primi- 
tive peoples  a  simple  form  of  credit  existed  as  .. 
soon  as  barter  came  into  existence  and  this 
was  a  phenomenon  almost  as  important  as  barter  itself. 
From  the  records  of  all  primitive  peoples  we  have  an 
abundance  of  evidence  to  establish  this.  Lending  food 
was  everywhere  common.  It  was  a  common  practice  for 
those  who  were  successful  in  the  chase  to  lend  game  or 
food  to  those  who  were  unsuccessful.  This  was  treated 
as  a  loan  which  the  borrower  was  to  return  after  the 
next  hunt.  The  credit  was  in  the  form  of  an  under- 
standing and  this  simple  method  of  credit  has  persisted 
to  the  present.  In  early  historical  times  the  loaning 
of  cattle  and  other  domestic  animals  was  common,  and 
even  to-day  in  rural  communities  the  loaning  of  corn 
and  household  provisions  to  neighbors  is  a  common 
practice. 

This  simple  form  of  credit,  nowever,  nas  no  import- 
ance in  the  modern  system  of  credit.  The  beginnings 
of  our  present  system  of  credit  are  difficult  to  trace. 
H.  D.  Macleod1  maintains  that  "the  whole  system  of 
credit,  banking  and  bills  of  exchange,  was  originated  by 
the  Romans,  and  a  long  series  of  illustrious  lawyers  had 
brought  the  theory  of  credit  to  a  state  of  absolute  per- 
fection: and  their  doctrines  were  embodied  and  declared 
to  be  law  in  the  great  code,  or  digest  of  roman  law, 
called  the  Pandects,  published  by  Justinian  in  the  early 

1  H.  D.  Macleod:  Theory  and  Practice  of  Banking,  p.  159. 


6  MERCANTILE  CREDIT 

part  of  the  sixth  century.  They  were  adopted  and 
confirmed  in  the  Basilica,  the  Reformed  Code  promul- 
gated by  the  Basilian  dynasty  in  the  tenth  century:  and 
they  have  been  the  mercantile  law  of  Europe,  except 
England,  for  1,300  years.  They  are  fully  set  forth  in  all 
the  great  continental  jurists:  but,  from  that  unfortunate 
aversion  which  the  common  lawyers  of  England  so  long 
entertained  against  the  Civil  Law,  they  were  compara- 
tively unknown  in  this  country :  though  adopted  in  equity : 
and  they  have  never  yet  found  their  way  into  any  treatise 
on  Political  Economy  either,  foreign  or  English."  The 
same  author  maintains  that  the  Roman  lawyers  brought 
the  theory  of  credit  to  perfection  as  early  as  the  sixth 
century.  He  furnishes  us  with  an  abundance  of  evidence 
concerning  the  forms  and  uses  of  credit  during  the  first 
part  of  the  mediaeval  period.  He  states  that  "when  the 
practice  of  writing  became  common  at  Rome,  it  was 
established  as  a  custom,  or  law,  that  every  Dominus,  or 
head  of  a  house,  should  keep  a  family  ledger  as  strict 
and  exact  as  those  of  a  modern  banker.  In  this  he  was 
obliged  to  enter  all  his  receipts  and  disbursements: 
all  sums  of  money  borrowed  and  lent:  all  trade  profits 
and  losses;  and  these  family  ledgers  were  the  only  legal 
evidence  of  debt  among  Roman  citizens  received  in 
courts  of  justice.  And  it  was  from  these  family  ledgers 
that  the  whole  modern  system  of  Book-keeping  and 
Credit  has  been  developed."1 

In  lending  money,  actual  contracts  were  made  by  for- 
mal ledger  entries  in  which  both  creditors  and  debtors 

1  H.  D.  Macleod:  Theory  and  Practice  of  Banking,  p.  163. 


THEORY  AND  HISTORY  OF  CREDIT        7 

made  entries  in  their  respective  ledgers  by  mutual  con- 
sent, "in  the  year  469  A  D.,  the  Emperor  Leo  abolished 
the  strict  formalities  of  the  Stipulation,  and  en- 
acted that  a  consent  given  in  any  form  what-  ._ 
ever,  so  long  as  the  parties  agreed  about  it, 
should  be  valid. 1  There  was  no  necessity  for  any  writing 
or  any  witnesses."  Bills  of  exchange  were  used  in 
foreign  credit  in  the  time  of  Cicero,  as  his  writings  bear 
ample  testimony.  At  the  time  of  the  Roman  Conquests, 
these  were  invented  by  Roman  bankers  who  established 
correspondents  abroad,  and  bills  were  given  on  these 
correspondents  when  Romans  traveled  abroad  or  when 
it  was  desired  to  meet  obligations  away  from  home. 
The  family  ledgers  gradually  fell  into  disuse  and  by  the 
time  of  Justinian  they  were  discontinued  entirely.  A 
documentary  acknowledgment  of  a  debt  known  as  a 
cawtia  and  a  formal  contract  or  promise  to  pay,  a 
cheirographum,  had  taken  its  place.  These  were 
transferable. 

Under  the  Code  of  the  XII  Tables,  debts  could  not  be 
sold,  or  rather  the  purchaser  of  an  account  could  not  bring 

action  in  the  name  of  another  to  collect  it. 

The  sale 
However,  if  the  debtor  agreed  that  the  creditor        ,  ,  . 

might  transfer  his  right  of  action,  it  could  be 

clone.     Both  in  Roman  and  in  English  law,  creditors 

began  to  establish  devices  by  which  they  could  sell  debts 

without  the   consent  of  their  debtors.     The   Emperor 

Alexander  Severus  in  224  A.  D.  published  a  constitution2 

1  H.  D.  Macleod:  Theory  and  Practice  of  Banking,  p.  168. 

2  Macleod:  Theory  and  Principles  of  Banking,  p.  208. 


8  MERCANTILE  CREDIT 

"by  which  the  absolute  freedom  of  the  sale  of  debts 
without  the  knowledge  or  consent  of  the  debtor  was 
recognized  and  allowed."  This  practice  has  been  recog- 
nized since  as  a  principle  of  the  mercantile  law  of  Europe 
except  in  England.  The  earliest  bills  of  exchange  con- 
tain no  statement  of  negotiability,  yet  they  have  been 
from  the  outset  negotiable  in  all  Europe  except 
England. 

At  the  present  time  the  laws  of  Scotland  do  not  re- 
quire a  statement  of  negotiability  on  a  bill  of  exchange  or 
promissory  note  to  make  it  salable.  This  is  because 
the  common  law  of  Scotland  has  adopted  the  general 
mercantile  law  of  the  continent.  On  the  other  hand, 
the  common  law  of  England  is  the  early  Roman  law  and 
a  bill  of  exchange  or  promissory  note  to  be  salable  must 
be  drawn  payable  to  order  or  to  bearer.  As  the  United 
States  follows  the  common  law  of  England,  with  reference 
to  negotiable  instruments,  bills  of  exchange  and  promis- 
sory notes  must  be  made  out  payable  to  order  or  to 
bearer  to  make  them  salable. 

The  early  banking  system  of  Greece  and  Rome  un- 
doubtedly gave  rise  to  the  institutions  of  credit  and  of 
banking   in   mediaeval   and  modern  Europe. 

Credit  in      However,  good  authors  claim  that  everything 

Babylon.  '  °  j 

of  value  in  banking  and  in  credit  in  Greece  and 

Rome  was  preceded  by  similar  institutions  in  Babylon 

several  hundred  years  before  Christ.     The  early  bankers 

of  Babylon  were  more  than  changers,  as  they  received 

money  on  deposit,  paid  interest  for  it,  and  loaned  it  for 

commercial  enterprises. 


THEORY  AND  HISTORY  OF  CREDIT        9 

In    mediaeval  times,  throughout    Europe    merchants 

brought  their  surplus  products  to  great  markets  or  fairs 

and  there  exchanged  them  for  the  surplus  prod-     _  _ 

o  •       1      m,  i  Influence 

ucts  of  other  countries.1     These  products  were     of  credit 

bartered,  the  merchants  bringing  with  them  on  the 
metals  which  were  used  in  settling  balances.  Great 
To  facilitate  exchange,  money  changers  estab- 
lished places  of  business  at  these  markets  and  thus  made 
possible  a  money  economy  in  place  of  the  system  of 
barter.  By  degrees  the  great  merchants  learned  that  it 
was  unnecessary  to  bring  their  goods  to  the  fairs;  that 
instead  of  doing  so  they  could  send  their  products  directly 
to  the  purchasers  and  secure  their  pay  by  writing  bills  of 
exchange.  We  have  already  seen  that  foreign  bills  of  ex- 
change were  used  to  facilitate  travel  and  to  pay  debts  in 
foreign  countries  in  the  early  part  of  the  Christian  era. 
Their  use  to  facilitate  foreign  trade  by  introducing  a 
means  of  payment  for  exported  goods  came  much  later. 
At  first  the  bill  of  exchange  was  drawn  by  the  money 
brokers  and  bankers  who  had  agents  abroad.  By  the 
end  of  the  fourteenth  century  it  had  attained  its  present 
use  in  England.2 

The  essential  feature  of  credit  is  the  exchange  of  goods, 
services,  etc.,  for  a  promise  to  pay  in  the  Me(jjum  0f 
future.     In  the  performance  of  this  function    exchange 

it  is  an  important  medium  of  exchange.     Its    function 

,  ,  •  ,      •      • ,  of  credit, 

great  use,  however,  consists  in  its  service  m 

transferring  capital.     In  economic   treatises  in   recent 

1  Encyclopaedia  Britannica. 

2  See  Cannonists. 


10  MERCANTILE  CREDIT 

years  the  medium  of  exchange  function  of  credit  has 
received  most  attention.  This  is  due  to  the  amount  of 
attention  that  has  been  given  to  the  subject  of  money 
because  nations  have  assumed  that  it  was  necessary  to 
adopt  a  policy  with  reference  to  their  coinage  system 
involving  the  use  of  two  metals  or  one  as  the  basis  of 
the  monetary  system.  Supplementing  the  use  of  money, 
the  influence  of  credit  in  determining  prices  naturally 
received  a  great  amount  of  attention. 

Into  the  subject  the  influence  of  credit  as  a  means  of 
exchange,  it  is  not  our  purpose  to  go  in  any  detail. 
However,  its  importance  warrants  brief  consideration. 
To  the  extent  that  money  is  an  improvement  over  barter 
in  effecting  exchanges,  to  the  same  extent  is  credit  an 
improvement  on  money. 

Professor  Johnson,1  in  treating  of  credit  as  a  medium  of 

exchange,  divides  it  into  (1)  credit  of  general  acceptability 

and  (2)  credit  of  limited  acceptability.     The 

0  former,  or  credit  money,  includes  those  in- 
classes 

of  credit,      struments  of  exchange  which  all  people  of  a 

country  are  willing  to  accept,  such  as  the  green- 
back, the  bank  note,  the  silver  dollar  and  the  silver  cer- 
tificate. They  consist  of  those  instruments  of  exchange 
whose  value  depends  upon  faith  in  their  convertibility; 
that  is,  the  belief  that  the  government  or  agency  which 
issues  them,  or  is  responsible  for  them,  will  accept  them 
in  exchange  for  real  money.  For  all  practical  purposes 
these  instruments  of  exchange  are  money. 

The   instruments   of   credit   of   limited   acceptability 

1  Money  and  Its  Uses,  pp.  2  and  44. 


THEORY  AND  HISTORY  OF  CREDIT       11 

have  use  as  a  medium  of  exchange  in  a  restricted  field. 
"They  include  the  promissory  note,  the  bill  of  exchange, 
various  forms  of  bank  credit  and  the  book  account." 
These  instruments,  the  real  instruments  of  credit,  are 
limited  in  scope,  but  to  a  large  extent  they  dispense  with 
the  need  for  money.  All  large  payments  of  money  are 
made  by  check  or  draft,  and  practically  all  payments  due 
in  foreign  countries  are  made  by  foreign  bills  or  drafts. 
The  great  bulk  of  the  exchanges  of  a  country  is  effected 
by  these  means.  The  industrial  prosperity  of  the 
country  would  be  greatly  retarded  if  it  were  not  for  these 
instruments  for  effecting  exchanges. 

The  extent  to  which  these  instruments  are  in  use  in 
the  various  countries  as  a  medium  of  exchange  depends 
somewhat  on  the  habits  of  the  people,  the  de- 
gree of  confidence  which  business  men  have  in    What 

governs 
each  other,  and   also  the  condition  of  pros-    the  extent 

perity.  On  the  continent  of  Europe  people  to  which 
are  much  less  inclined  to  pay  bills  by  writ-  credit  in- 
ing  checks  against  deposits  in  banking  institu-  , 

tions  than  English  and  American  people 
are.  This  is  due  to  their  conservative  habits.  In 
prosperous  times  people  use  credit  instruments  to  a 
much  greater  extent  than  in  periods  of  depression  or 
of  inactivity.  Relatively  speaking,  where  free  use  is 
made  of  credit  instruments  as  a  means  of  exchange, 
but  little  use  is  made  of  money,  and  where  but  little  use 
is  made  of  credit  instruments,  money  must  be  freely 
used. 

The  area  over  which  credit  instruments  are  used  as  a 


12  MERCANTILE  CREDIT 

means  of  exchange  is  limited  by  the  area  over  which 
business  men  have  confidence  in  each  other.  Conse- 
quently the  larger  the  area  of  business  confidence  the 
greater  will  be  the  resort  to  credit  instruments  for  this 
purpose. 

As  has  been  stated,  the  great  function  of  credit  is  to 

promote  the  production  of  wealth  and  to  facilitate  the 

exchange  of  capital.     It  consists   in  the  ex- 

The  chief  change  of  commodities,  money  or  services, 
functions  &  .  ,    J  „  _    ' 

of  credit.      *or   a   Promise   to   pay   in  the  future.     The 

various  producing  industries — mining,  manu- 
facturing, agriculture,  mercantile  and  transporting — 
must  secure  raw  materials,  machinery  and  other  instru- 
ments of  production  as  well  as  funds  for  building  and 
other  purposes.  This  is  advanced  at  the  outset  by 
investors  as  capital  credit,  and  later  the  various  in  stitu- 
tions  engaged  in  production  find  it  necessary  to  secure 
funds,  usually  from  banking  institutions,  in  exchange  for 
their  promise  to  pay.  Public  credit  is  also  to  an  in- 
creasing extent  used  to  secure  funds  for  productive 
purposes. 

The  use  of  credit  funds  for  exchange  and  production 

purposes  may  be  seen  from  the  following  illustrations 

from  the  manufacturing  industry.    The  manu- 

Use  of  facturer   engaged  in   the  production  of  ma- 

credit  il-        ,  .        ,  „.  .  .    ,  •  , 

lustrated.     chines  has  not  sufficient  capital,  raw  materials, 

machinery  and  funds  to  employ  laborers  to 

carry   on   the   productive   process   until   his   products, 

the  machines,  are  sold.     He  goes  to  the  producer  of 

raw  materials  and  asks  him  to  exchange  the  raw  materials 


THEORY  AND  HISTORY  OF  CREDIT       13 

for  a  promise  to  pay  at  a  time  usually  when  his  products 
are  sold.  If  his  credit  is  good,  he  secures  the  raw  material 
and  gives  in  exchange  his  promise  to  pay  a  sum  which  is 
somewhat  more  than  the  present  value  of  the  raw 
materials.  This  amount,  known  as  interest,  which  is 
greater  than  the  present  value  of  the  goods  sold,  is  to 
compensate  the  seller  for  waiting  for  his  money,  and  is  a 
large  or  small  amount  as  the  risk  of  not  being  paid  is 
great  or  small. 

To  carry  on  the  productive  process  it  is  necessary 
to  employ  many  workers  who  labor  for  wages  which 
are  usually  paid  weekly  or  who  labor  for  salaries  which 
are  usually  paid  monthly.  If  the  manufacturer  has 
good  credit  the  wage  earners  will  advance  their  services 
throughout  the  week  for  a  promise  to  pay  at  the  close  of 
the  week;  and  those  who  work  for  salaries  will  advance 
their  services  during  the  month  for  the  promise  to  pay 
at  the  close  of  the  month.  The  contracts  for  these 
credit  transactions  may  be  written,  but  in  the  great 
majority  of  cases  they  are  oral  but  are  none  the  less 
binding  on  that  account. 

The  same  manufacturer  must  secure  an  advancement 
of  money  or  funds  from  banking  institutions  because  he 
must  pay  his  labor  before  he  can  realize  on  the  goods 
they  are  producing  and  often  because  in  selling  his 
goods  he  must  wait  several  months  before  he  can  secure 
his  pay  for  them.  The  banker  whose  function  is  to 
deal  in  credit,  advances  money  or  the  right  to  draw 
funds  at  any  time  in  exchange  for  the  promise  of  the 
manufacturer  to  pay  in  the  future. 


14  MERCANTILE  CREDIT 

Professor  Laughlin1  is  right  in  insisting  that  if  "an 
essential  function  of  capital  is  to  discount  the  future, 
the  essential  characteristic  of  credit  is  the  element  in 
E  ..  ,  it  of  futurity."  Any  transaction  which  does 
character-  not  involve  the  promise  or  the  obligation  to 
istic  of  pay  in  the  future  is  not  a  credit  transaction, 
credit.  ^  barter  or  a  cash  sale  in  which  the  transac- 

tion is  closed,  is  just  the  opposite  of  a  credit  transaction 
which  calls  for  payment  in  the  future. 

There  ought  to  be  no  reason  for  a  quarrel  between 
Professor  Laughlin  in  claiming  that  the  essential  thing 
c    fi  in  credit  is  futurity  and  those  who  insist  on 

dence  as  a  the  importance  of  confidence  in  credit.  Each 
basis  of  plays  an  important  although  a  distinct  role, 
loans.  Futurity   is   the   distinctive  factor  in  credit 

itself,  while  confidence  lies  at  the  basis  of  the  granting 
of  credit.  Professor  Laughlin  himself  makes  this  dis- 
tinction, but  unfortunately  in  the  minds  of  his  critics 
he  assigns  to  confidence  a  subordinate  role.  In  mercan- 
tile credit  confidence  is  especially  important.  The 
seller  of  goods  accepts  the  promise  of  an  individual  with- 
out means  to  pay  only  (1)  when  he  has  confidence  in  his 
ability  to  pay  and  (2)  when  he  has  confidence  in  his 
willingness  to  pay  in  the  future.  These  two  factors 
are  important  in  all  mercantile  loans.  A  commercial 
loan  is  not  based  on  goods  as  many  suppose.  The 
goods  advanced  are  offered  for  sale  by  the  purchaser 
and  the  original  seller  has  no  specific  claim  on  them 
or  on  the  proceeds  of  their  sale  only  in  exceptional 

1  Laughlin:  The  Principles  of  Money,  p.  73. 


THEORY  AND  HISTORY  OF  CREDIT       15 

cases.  Confidence  in  willingness  and  in  ability  to  pay 
are  the  foundations  of  all  mercantile  credit.  In  bank 
loans  where  collateral  is  demanded  and  in  all  mortgage 
loans,  the  situation  is  different.  In  these  cases,  the  one 
who  accepts  a  promise  to  pay  receives  with  it  securities 
which  insure  payment  when  the  debt  is  due.  However, 
bank  loans  based  on  collateral  are  decreasing  in  impor- 
tance as  contrasted  with  loans  made  to  corporations  and 
business  houses  based  on  their  credit  standing  and  their 
ability  to  pay  their  debts. 

The  dispute  as  to  whether  credit  is  based  on  money 
or  goods,  whether  it  is  a  demand  for  money  or  for  goods 

is  not  important  for  our  purposes  here.     A    „ 

Relation 
description  of  the  relation  between  credit  and    between 

money  and  credit  and  goods  will  suffice.     As    credit, 

has  been  stated  a  credit  transaction  is  the    moneyi 

,  -  ,  -  .        and  goods, 

exchange  of  goods  or  services  for  a  promise 

to  pay  in  the  future.  The  promise  to  pay  is  usually 
expressed  in  terms  of  money.  This  credit  transaction  is 
also  usually  completed  by  the  payment  of  money,  credit 
money  or  a  title  to  money.  When  a  bank  borrows 
money  for  thirty  or  sixty  days  time,  it  may  cancel  the 
debt  by  paying  gold,  credit  money,  or  by  a  book  credit, 
giving  the  lender  the  right  to  draw  money.  However 
the  debt  may  be  paid,  the  contract  in  the  United  States 
calls  for  its  payment  in  dollars  of  23.22  grains  of  pure  gold, 
and  the  lender  may  demand  payment  in  gold  if  he  chooses 
to  do  so.  So  far  as  the  credit  transaction  is  concerned, 
there  can  be  no  question  that  the  contract  calls  for  pay- 
ment in  money. 


16  MERCANTILE  CREDIT 

All  convertible  or  credit  money  is  a  demand  for  money, 
and  it  gives  its  possessor  the  title  to  this  money — which  is 
a  commodity  and  has  real  value.  Of  course  the  purpose 
in  securing  money  is  not  on  account  of  any  satisfaction 
which  money  may  give,  but  because  of  the  goods  it  will 
buy.  When  a  merchant  or  manufacturer  sells  goods 
and  accepts  a  promise  to  pay  money,  what  he  desires 
ultimately  is  not  money,  but  production  or  consumption 
goods.  The  same  is  true  of  the  laborer  who  works  for 
wages  and  all  others  who  contribute  something  to  the 
productive  process.  What  they  want  is  not  money  but 
what  money  will  buy,  the  necessaries  and  luxuries  of 
life  and  the  means  of  production. 

The  contention  that  credit  is  based  on  goods  and 
is  limited  to  the  amount  of  goods  in  existence  is  not 
Wh  t  wholly  correct.     In  the  case  of  a  mercantile 

limits  the  loan,  the  sale  of  goods  on  time,  it  will  be  seen 
amount  of  later  how  funds  may  be  advanced  to  several 
credit.  times  the  value  of  the  goods.     In  mortgage 

loans  and  loans  based  on  the  deposit  of  collateral,  the 
loan  is  definitely  limited  by  the  quantity  of  property 
or  wealth  the  borrower  has.  In  most  cases,  however, 
the  loans  are  based  not  only  upon  the  quantity  of  prop- 
erty the  borrower  has,  but  upon  the  lender's  confidence 
in  his  integrity  and  in  his  ability  to  produce.  As 
Professor  Johnson  puts  it,  "Credit  is  limited,  therefore, 
not  by  a  community's  wealth,  but  by  that  plus  lenders' 
estimates  of  its  power  to  produce  wealth."1 

Although  credit  makes  possible  an  increase  in  the 

1  Johnson:  Money  and  Currency,  p.  38. 


THEORY  AND  HISTORY  OF  CREDIT       17 

production  of  wealth  and  facilitates  the  utilization  of 
capital,  it  is  neither  wealth  nor  capital.  Much 
misunderstanding    exists    among    competent    Cre<"t not 
authors  on  this  point  through  a  failure  to  ap-    capital. 
preciate   the    real    significance    of    economic 
terms,  especially  wealth  and  capital. 

Wealth  consists  of  economic  goods.  Capital  goods 
consist  of  the  economic  goods  used  in  the  production  of 
wealth.  Credit  which  has  been  defined  as  "the  power 
to  secure  commodities  or  services  at  the  present  time  in 
exchange  for  some  equivalent  promised  at  a  future  time" 
is  no  more  wealth  or  capital  than  is  labor  power  or 
organizing  ability.  Labor  power  contributes  greatly  to 
the  wealth  and  capital  of  a  country  but  it  is  not  for 
that  reason  capital.  Organizing  ability  also  increases 
wealth  and  capital  but  it  is  not  for  that  reason  either 
wealth  or  capital.  The  division  of  labor  has  been  one 
of  the  greatest  factors  in  the  increase  of  the  wealth  of 
society,  but  the  division  of  labor  is  never  thought  of 
as  wealth  or  capital.  The  credit  transaction  which 
consists  of  an  exchange  of  goods  or  services  for  a  promise 
to  pay  does  not  increase  the  sum  total  of  economic 
goods.  It  simply  means  an  exchange  of  possessors. 
Although  many  credit  instruments  may  be  exchanged, 
the  actual  means  of  satisfying  wants  have  not  been 
increased  by  the  process. 

We  may  admit  the  statement  of  Daniel  Webster  that 
"credit  has  done  more  a  thousand  times,  to  enrich  nations 
than  all  the  mines  of  all  the  world,"  without  conceding 
that  it  is  either  wealth  or  capital.     What  then  is  the 


18  MERCANTILE  CREDIT 

function  of  credit?  As  Levasseur  puts  it,  "Admit  in 
summing  up  this  analysis,  that  credit  strictly  speaking, 
creates  nothing,  that  it  is  simply  a  displacement  of 
capital;  nevertheless  in  transporting  capital  to  a  place 
where  it  can  be  employed  most  profitably,  in  furnishing 
tools  to  labor,  in  rendering  active  that  which  was 
inactive,  and  fertilizing  that  which  was  sterile,  this 
simple  displacement  introduces  a  profound  modification 
into  the  economy  of  society,  it  renders  production  more 
active  and  increases  wealth."1 

1  Elements  of  Political  Economy,  p.  208.      Translated  by  T. 
Marburg. 


CHAPTER  II 
CREDIT  INSTRUMENTS 

A  credit  transaction  is  one  in  which  something  of 
value  is  exchanged  for  an  obligation  to  pay  in  the  future. 
A  credit  instrument  is  the  evidence  of  this  ob- 
ligation.    It  may  be  exchanged  for  economic     . 
goods  in  which  case  it  constitutes  a  demand 
on  the  part  of  its  possessor  for  the  payment  of  the  obli- 
gation at  maturity  or,  like  the  book  account,  it  may  be 
simply  a  record  of  the  contractual  relations  between 
debtors  and  creditors.     One  writer  prefers  the  use  of 
"instrumentalities   rather   than   instruments,   to   cover 
cases  of  orders  and  promises  by  telegram  and  telephone."1 

Credit  instruments  may  be  divided  into  (1)  promises 
to  pay  and  (2)  orders  to  pay.     The  chief  promises  to 
pay   are    promissory  notes,  bank  notes,  de- 
posits,  book  accounts,  stock  certificates,  bonds,    ciasses  0f 
etc.,  and  the  chief  orders  to  pay  are  drafts,    credit 
bills  of  exchange,  checks,  circular  letters  of    instru_ 
credit,  post-office  orders,  mobilizing  certificates 
of  all  kinds  such  as  warehouse  receipts,  bills  of  lading,  etc. 

A  promissory  note  is  a  written  promise  to  pay  a 

certain  sum  of  money  at  a  future  time  under  definite 

conditions.     Promissory  notes  are  frequently  exchanged 

for  goods  or  funds.     They  are  among  the  most  com- 

1  Andrews:  Institutes  of  Economics,  p.  143. 

19 


20  MERCANTILE  CREDIT 

mon  of  credit  instruments.     A  man  whose  credit  is  good 

may  exchange  his  promise  to  pay  in  the  form  of   a 

promissory  note  for  goods,  or  for  money  or 

The  pro-      other  funds.     They  are  made  either  negotia- 

missory 

note.  hie  or  non-negotiable.     If  the  note  is  made 

payable  to  a  particular  person  without  order 

or  bearer  on  the  note,  it  is  non-negotiable.     If  it  is  made 

payable  to  order  or  to  bearer,  it  is  negotiable.      The 

negotiable  promissory  notes  are  the  most  common  form 

of  note  credit  instruments.     They  are  used  freely  in  the 

payment  of  debts,  and  consequently  may  be  transferred 

a  great  many  times,  and  on  this  account  perform  all  the 

functions  of  money.     When  sold,  they  must  be  endorsed 

by  the  person  to  whom  the  note  is  ordered  to  be  paid. 

The  endorsement  may  be  either  in  blank  or  special. 

The  former  specifies  no   indorsee   and   an  instrument 

so  indorsed  is  payable  to  bearer  and  may  be  sold  on 

delivery.      A  special  indorsement  indicates  the  person 

to  whom  or  to  whose  order  the  note  is  to  be  paid,  and 

must  be  endorsed  by  such  person  before  it  can  be  sold 

again. 

The  promissory  note  was  used  early  in  the  history 

of  credit  transactions.     It  is  now  the  most  common 

instrument  used  for  the  transfer  of  funds.     In 

Use  of  the    the  united  States  prior  to  the  Civil  War  when 
promis-  .  ,  .. 

sory  note,     goods  were  sold  on  time,  except  by  retailers, 

the    promissory  note  was  almost  invariably 

used.     Even  since  the  Civil  War  it  has  been  used  for 

this  purpose  more  than  any  other  instrument  of  credit. 

On  account  of  its  ease  of  negotiability  it  serves  this 


CREDIT  INSTRUMENTS  21 

purpose  well  as  it  often  passes  through  many  hands 
before  it  is  finally  paid. 

A  bank  note  is  a  bank's  promise  to  pay  the  bearer 
the  amount  specified  on  its  face.  As  it  is  intended  to 
pass  freely  from  hand  to  hand,  it  is  a  credit 
instrument  of  general  acceptability.  The  free-  e  an 
dom  with  which  it  circulates  at  its  face  value 
depends  upon  the  general  credit  standing  of  the  banking 
institution  or  upon  special  provisions  made  for  the 
redemption  of  the  note  circulation  of  banks.  It  is  well 
known  that  the  note  issues  of  private  and  state  banks 
in  the  United  States  before  the  Civil  War  fluctuated 
greatly  in  value,  while  the  national  bank  notes  issued 
in  accordance  with  the  National  Banking  Act  of  1863 
are  absolutely  safe  owing  to  the  use  of  United  States 
bonds  pledged  to  their  redemption.  In  other  countries 
as  Canada  where  bank  asset  currency  prevails,  bank 
assets  may  be  used  in  such  a  way  as  to  make  bank  notes 
practically  safe. 

A  bank  deposit  imposes  on  a  banking  institution  the 
same  obligation  as  the  bank  note.     Both  are  promises 
of  the  bank  to  pay  on  demand.     In  the  case 
of  bank  deposits,  the  only  record  which  deposi-        e    00 
tors  have  of  the  obligations  of  the  bank,  is  in 
the  books  of  the  bank  and  in  the  pass  book  in  possession 
of  the  depositor,  which  contains  a  copy  of  the  bank-book 
record.     The  depositor  in  this  case  exchanges  funds  for 
the  promise  of  the  bank  to  pay  on  demand,  in  which 
case  the  credit  instrument  is  a  book  account  which  the 
bank  keeps.     For  purposes  of  collection  this  account 


22  MERCANTILE  CREDIT 

or  credit  instrument  is  as  valuable  as  any  that  are 
recorded. 

In  the  use  of  the  book  account  as  an  evidence  of  debt 
one  person  may  exchange  money  and  other  property  for  a 
credit  upon  books.  That  is  a  right  of  action  on  the  part 
of  one  who  exchanges  something  valuable  is  secured 
against  the  individual  who  receives  it.  Common  cases  of 
book  accounts  are  those  used  by  the  retailer  when  he 
sells  goods  to  a  consumer,  or  by  a  banking  institution  in 
making  a  record  of  deposits.  In  the  former  case,  the 
retailer  exchanges  goods  for  a  promise  to  pay,  which 
evidence  is  on  the  books  of  the  retail  institution.  This 
record  of  the  debt  gives  the  retailer  a  right  of  action 
against  the  receiver  of  goods  for  the  value  of  the  goods  as 
indicated  by  the  books.  The  book  account  is  as  valuable 
a  credit  instrument  as  any  that  is  used.  It  does  not, 
however,  serve  the  purpose  as  a  medium  of  exchange 
or  serve  the  purpose  of  paying  many  obligations  the 
same  as  checks  or  other  credit  instruments  to  be  con- 
sidered later.  However,  the  book  account  may  be 
sold  and  the  purchaser  of  the  book  account  has  the 
same  right  of  action  against  the  debtor  as  the  original 
creditor  had.  When  a  retail  business  is  sold,  the  book 
accounts  are  usually  a  part  of  the  sale.  Book  accounts 
may  also  be  sold  outright  to  any  one  who  wishes  to 
make  the  purchase  and  who  will  take  the  responsibility 
of  collecting  debts. 

The  book  account  is  perhaps  the  oldest  of  credit 
instruments.  Some  primitive  peoples  kept  records  of 
things  loaned.     We  have  already  seen  how  the  family 


CREDIT  INSTRUMENTS  23 

ledger    was    used    in    ancient    Rome   to    record  credit 
relations  and  these  credit  transactions  which  were  re- 
corded in  the  register  were  legally  binding. 
Book  accounts  are  kept  as  customary  the  only        se^  ° 
evidence    of    debt    by   professional    men    as      COunts. 
lawyers,  doctors,  etc.,  and  by  manufacturers, 
builders,  contractors,  etc.      These  accounts  have  a  legal 
status  and  are  salable. 

A  modern  use1  of  the  book  account  in  banking  trans- 
actions in  lending  on  open  book  accounts  has  developed 
in  recent  years  as  a  result  of  changes  in  trade 

organization.     When    the    commission    mer-  new, 

type  of 
chant   was    a    powerful   factor   in   trade    he         loans. 

performed  the  function  of  banker  as  well  as 
merchant  in  that  he  often  advanced  funds  to  the  mill 
owner,  to  the  planter  or  to  both  of  them.  Since  his 
disappearance,  there  has  arisen  a  banker  who  now  con- 
ducts the  financial  part  of  the  commission  merchant's 
business  in  advancing  funds  to  reliable  traders  or  manu- 
facturers on  open  book  accounts.  The  trader  who  has 
borrowed  from  his  banker  all  that  his  means  and  credit 
standing  will  permit  sometimes  finds  himself  handicapped 
in  trade  when  he  cannot  pay  cash  for  the  goods  he  buys. 
This  new  type  of  banker  requests  such  a  person  to  furnish 
him  the  names  of  the  firms  from  whom  he  wishes  to  buy. 
When  their  ratings  are  found  to  be  satisfactory,  an  in- 
demnity bond  is  secured  covering  the  goods  in  question. 
The  invoice  of  the  seller  must  contain  a  notice  that  pay- 
ment for  the  goods  should  be  made  to  the  banker.  When 
1  The  Journal  of  Accountancy,  Feb.,  1912,  pp.  127-132. 


24  MERCANTILE  CREDIT 

a  notice  is  received  to  the  effect  that  an  order  for  the 
goods  has  been  filled  the  shipper  is  sent  an  amount  not 
exceeding  80  per  cent,  of  the  value  of  the  goods,  and  this  is 
charged  to  the  account  of  the  purchaser.  When  pay- 
ment is  received  the  banking  concern  deducts  the  inter- 
est on  the  amount  advanced,  charges  a  fee  for  its  services, 
and  pays  the  seller  the  amount  still  due  him.  A  method 
similar  to  this  is  sometimes  used  in  advancing  funds  to 
importers  of  foreign  goods. 

"A  share  of  stock  is  a  certificate  of  ownership  in  a 

corporation."1     The  stockholders  are  the  owners  of  the 

property  of  the  company.     However,  a  credit 

Stock  relation  exists  between  the  stockholders  and 

certin-  .  . 

cates.  their   corporation.     In   purchasing  stock  the 

stockholders  exchange  funds  for  stock  cer- 
tificates, which  are  credit  instruments  that  indicate  the 
number  of  shares  of  the  company  to  which  the  holder  is 
entitled.  While  the  stock  certificates  themselves  are 
not  negotiable,  for  all  practical  purposes  they  are.  The 
registered  holder  of  them  may  sell  them  and  deliver 
them  to  the  buyer  with  his  assignment  in  blank,  and  in 
this  way  they  may  pass  through  a  great  many  hands 
without  any  registration  on  the  books  of  the  corpora- 
tion. Stocks  are  used  extensively  as  collateral  for  bank 
loans,  and  the  more  fully  negotiable  they  are  the  better 
they  are  for  this  purpose;  consequently  the  tendency  is 
to  make  them  more  easily  transferable. 

The  two  main  classes  of  stocks  are  the  preferred  and 
the   common   shares.     The   preferred   stockholders   are 

1  Meade:  Trust  Finance,  p.  150. 


CREDIT  INSTRUMENTS  25 

given  a  preferred  claim  to  the  profits  of  the  company 
and  in  event  of  dissolution  of  the  corporation  they  are 
usually  given  a  preferred  claim  to  the  assets  preferred 
of  the  company.  The  preferred  stockholders  and  com- 
are  usually  paid  an  assured  dividend  which  mon 
must  be  paid  before  the  common  stockholders 
receive  any  dividends  at  all.  The  common  stockholders, 
upon  the  other  hand,  frequently  have  the  exclusive  man- 
agement of  the  business  of  the  corporation,  and  while 
they  receive  what  is  left  of  the  profits  of  the  company 
after  the  preferred  stockholders  and  in  some  cases  the 
bondholders  are  paid,  if  the  business  is  a  very  successful 
one  they  receive  comparatively  large  profits. 

The  leading  stock  investments  are  in  public  service 
corporations  and  in  industrial  companies.  As  corporate 
organization  in  these  enterprises  has  increased  vastly 
the  last  fifty  years  property  in  the  various  classes  of 
stocks  has  also  increased  to  vast  proportions. 

What  is  said  of  the  increase  of  stocks  as  credit  instru- 
ments may  also  be  said  of  bonds  in  industrial  and  public 

service  securities.     However,  bonds  are  more         _ 

Bonds. 
extensive  than   stocks,  as  they  include  also 

loans  to  governments,  national,  state,  and  local.  Like 
the  stock  certificate  the  bond  is  ordinarily  negotiable 
and  as  it  too  is  used  as  collateral  to  secure  loans  there 
is  every  reason  to  facilitate  its  negotiability.  A  bond 
is  a  promissory  note  in  which  a  government,  a  corpora- 
tion, or  in  exceptional  cases,  an  individual  promises  to 
pay  a  certain  sum  of  money.  A  bond  differs  from  an 
ordinary  promissory  note  in  that  "it  is  issued  as  a  part 


26  MERCANTILE  CREDIT 

of  a  series  of  like  tenor  and  amount,  and  in  most  cases 

under  a  common  security."1     The  security  for  a  bond, 

like  that  of  a  note,  may  be  found  written  upon  the  face 

or  back  of  the  bond  itself."2 

Corporate  bonds  are  different  from  corporate  stocks 

as  the  bond  holder  is  a  lender  to  the  corporation  who  is 

promised  a  definite  sum  of  money  at  a  speci- 

orpora  e     ^^  time  at  a  certain  rate  of  interest  and  ordi- 
bonds. 

narily  he  has  nothing  to  do  with  the  manage- 
ment of  the  company.  The  bondholder  usually  has  some 
kind  of  property  pledged  to  the  payment  of  the  note  while 
there  is  no  pledge  of  property  to  pay  the  holder  of  stock. 
The  different  kinds  of  bonds,  classified  with  respect 
to  their  security,  are  numerous,  including  such  as  real 

estate  bonds,  general  mortgage  bonds,  blanket 
.   n  ,s  °        mortgage  bonds,  equipment  bonds,  debenture 

bonds,  etc.  The  name  of  the  bond  indicates 
the  character  of  the  security  offered,  but  it  is  not  within 
the  province  of  this  treatise  to  go  farther  into  the  sub- 
ject of  the  security  offered. 

Of  the  credit  instruments  which  are  orders  to  pay, 
the  check  has  come  to  be  the  most  important  in  the 

United  States.  It  is  an  instrument  authoriz- 
Checks. 

ing  the  transfer  of  funds  which  are  credited 

to  the  maker  of  the  instrument.     It  is  a  written  order 

by  an  individual  who  has  a  deposit  in  a  bank  upon  the 

banking  institution  to  pay  a   certain  sum  of  money. 

Checks  are  sight  bills  on  bankers.     The  check  when  pay- 

1  Cleveland:  Funds  and  Their  Uses,  p.  169. 

2  Cleveland:  Fwids  and  Their  Uses,  p.  169. 


CREDIT  INSTRUMENTS  27 

able  to  bearer  or  to  order  is  a  negotiable  instrument  and 
the  individual  who  receives  it,  upon  endorsing  it,  may 
transfer  it  to  some  one  else  in  payment  of  an  obligation. 
The  check  may  circulate  very  freely  in  the  business  com- 
munity, and  it  may  cancel  many  obligations  the  same 
as  money  can.  It  is  used  in  the  payment  of  obligations 
both  locally  and  at  a  distance,  and  to  the  extent  that 
it  is  used,  it  dispenses  with  the  need  of  money. 

Records  from  Babylonian  history1  show  the  existence 
of  deposit  banking  in  Babylonia.     At  first  depositors 
left  their  money  with  large  money  lenders  for     ^-se  Q^ 
which  they  accepted  receipts.     Against  these      checks  in 
funds  depositors  wrote  checks  ordering   the     early 
bankers     to    pay     money     to     creditors     of 
depositors.     We  see  that  the  beginning  of  the  check 
system  thus  dates  back  to  early  Babylonian   history. 
The  deposit  system  was  established  in   Sicily  in  the 
fourteenth    century    and    depositors    were    given    the 
privilege    of   ordering   by  check   payment   of   sums   of 
money  to  others. 

In  the  United  States  and  Great  Britain  the  greater 
share  of  cash  pa3rments  are  made  by  checks.     In  other 
commercial   countries  the  tendency  to   pay 
large  sums  of  money  by  checks  rather  than       ^e  ° 
by  cash  is  rapidly  increasing.     Bills  and  notes      present, 
are  used  for  time  transactions  while  checks  are 
used  for  cash  payments.     The  latter  are  superior  to  bills 
as  they  may  be  used  in  making  payments  promptly  and 
consequently  afford  a  faster  method  of  doing  business. 

1  Aldrich:  Money  and  Credit,  p.  72. 


28  MERCANTILE  CREDIT 

Checks  are  usually  presented,  not  where  the  deposit  is, 
but  in  the  holder's  bank,  and  a  completely  developed 
clearing  house  system  enables  the  banks  in  a  commer- 
cial community  to  settle  their  claims  against  each  other 
without  delay. 

Closely  associated  with  the  common  check  are  the 

certified  check,  the  cashier's  check,  the  cheque  bank 

check,  the  letter  of  credit,  the  traveler's  check 

checks         an<^  *^e  Post-office  money  order.     They  are  all 

practically  orders  to   pay  funds  which   the 

drawer  has  deposited,  or  to  which  he  is  entitled. 

It  sometimes  happens  that  a  depositor  will  desire  to 
make  payments  where  he  is  not  known  and  where  the 
payee  does  not  care  to  take  chances  on  a  private  check. 
Two  devices  are  open  to  him:  (1)  He  may  draw  his  check 
for  the  amount  desired,  have  the  cashier  of  the  bank 
where  his  deposits  are  write  above  his  signature  across 
the  face  of  the  check  "certified"  or  "good  when  properly 
endorsed."  This  certified  check  is  acceptable  to  the 
payee  because  its  payment  is  guaranteed  by  the  bank. 
(2)  The  second  method  is  to  exchange  his  check  for  the 
"cashier's  check"  made  payable  to  the  person  designated 
by  the  depositor. 

An  institution  known  as  a  "Cheque  Bank"  sells  to 

its  customers  a  book  of  its  checks  made  up  of  assorted 

blanks,  and  across  the  face  of  each  is  written 
The 
cheque         ^e  maximum  amount  for  which  each  may  be 

bank.  drawn.     The    buyer    pays    the    sum    of    the 

amounts  written  on  each  check  and  when  the 

book  is  returned,  the  bank  refunds  the  difference  between 


CREDIT  INSTRUMENTS  29 

the  amount  paid  for  the  cheque  book  and  the  amounts 

paid  out.     The  purpose  of  the  cheque  bank  is  to  make  its 

checks  more  acceptable  than  the  common  check. 

A  similar  method  of  transferring  funds  also  for  the 

benefit   primarily   of  travelers   is   the   travelers'   check 

issued    by    express     companies.     The     best 

known  of  these  are  the  American  Express 

travelers 
Company  s   checks.     The   purchaser   secures      check. 

from    an    office    of    the    American    Express 

Company  a  number  of  checks  of  various  denominations 

to  suit  the  convenience  of  the  traveler.     They  are  bound 

together  so  that  they  may  be  carried  conveniently  and, 

as  the  agents  who  are  authorized  to  pay  these  checks 

are  widely  distributed,  the  holder  of  these  checks  finds 

them  very  convenient  as  he  can  have  them  redeemed 

by  banks,  hotels,  business  houses,  etc. 

The  letter  of  credit  is  intended  primarily   for   the 

convenience  of  those  who  travel  in  a  foreign  country  to 

enable  them  to  collect  funds  where  they  are 

unknown.     The   purchaser   of   the   letter  of  ... 

*,  credit. 

credit  secures  the  right  to  draw  sums  of  money 
at  different  times  not  to  exceed  the  face  value  of  the  letter, 
while  the  letter  of  credit  is  a  guaranteed  account  by  the 
bank  issuing  it.  When  funds  are  drawn  where  the  letter 
of  credit  is  presented,  the  bank  official  writes  down  the 
amount  drawn  on  the  letter  and  he  requires  the  customer 
to  write  his  name  and  this  signature  is  compared  with  the 
signature  of  the  holder  at  the  time  the  letter  of  credit  was 
purchased.  Letters  of  credit  are  of  great  convenience  to 
the  traveling  public  as  advancements  may  be  secured 


30  MERCANTILE  CREDIT 

nearly  everywhere  and  no  identification  is  necessary  aside 

from  the  comparison  of  signatures. 

The  post-office  money  order  is  an  instrument  widely 

used  in  America  for  transferring  funds.     It  performs 

practically  the  same  function  in  transferring 

Post  office    money  as  checks  and  banks  drafts.     One  who 

money 

order.  desires  money  sent  to  some  one  at  a  distance 

may  go  to  the  nearest  post-office  station,  pur- 
chase a  money  order  for  the  amount  desired,  which  is 
made  payable  to  the  person  specified.  It  is  then  sent  by 
mail  to  the  payee  who  presents  it  at  his  post  office  and 
receives  the  amount  designated. 

A  bank  draft  is  a  bank's  check  upon  any  banking  in- 
stitution in  which  it  has  a  deposit  or  credit  relations 

to  pay  a  certain  sum  of  money.     It  is  an 

.    ..  instrument  used  by  a  bank  to  draw  funds  from 

draft.  ... 

another  bank  in  which  it  has  deposits  the  same 

as  a  check  is  an  instrument  by  which  a  depositor  draws 

funds  from  a  bank  where  he  has  deposited  money.     The 

person  receiving  the  draft,  the  payee,  may  upon  endorsing 

it  sell  it  to  some  one  else  and  it  may  serve  as  a  medium 

of  exchange,  passing  through  a  great  many  hands.     The 

bank  draft  is  used  to  pay  debts  at  a  distance,  to  transfer 

money  to  remote  sections  of  a  country  or  to  a  foreign 

country,   and   also  to  facilitate  travel  by  transferring 

money  with  but  little  risk  to  places  where  it  is  made 

available. 

The  bank  draft  was  the  earliest  Bill  of  Exchange. 

Bank  drafts  were  dealt   in   extensively  in  Greek  and 

Roman  times.     The  money  changers  or  bankers  had 


CREDIT  INSTRUMENTS  31 

branches  or  agents  in  distant  cities  and  foreign  countries 
upon  whom  they  drew  for  the  payment  of  money.  By 
selling  drafts  they  enabled  merchants  to  pay  debts  in- 
curred in  purchasing  merchandise  at  a  distance.  In 
selling  drafts  to  travelers  they  enabled  the  latter  to  go  to 
distant  countries,  obtain  the  money  of  the  country  and 
travel  with  ease. 

A  bill  of  exchange  or  commercial  draft  is  an  order  or 
request  by  one  person  upon  another  to  pay  a  certain 
sum  of  money.     The  payee  may  be  the  drawer 

of  the  bill  or  some  one  that  the  drawer  owes.  . 

exchange. 

In  either  case  the  amount  paid  is  charged  to 
the  account  of  the  drawer.  The  occasion  which  gives 
rise  to  a  commercial  draft  is  usually  a  sale  of  goods. 
The  seller  of  merchandise  makes  out  an  order  against  the 
purchaser  to  pay  the  purchase  price  of  the  goods  either 
to  himself  or  to  some  one  else  who  is  to  collect  the  bill. 
The  bill  may  be  made  out  payable  at  sight  or  after  sight. 
The  former  is  known  as  a  sight  draft.  If  the  seller  of 
the  merchandise  desires  to  give  credit  to  the  purchaser 
for  a  few  months,  the  bill  of  exchange  is  made  out  pay- 
able after  the  lapse  of  the  credit  period.  The  bill  may 
be  accepted  by  the  purchaser  of  the  goods  writing  across 
the  face  of  the  instrument  "accepted"  with  the  date  of 
acceptance  and  signing  it. 

The  bill  may  then  be  sold  to  a  banking  institution 
or  any  one  else  who  will  make  the  purchase  and  both 
the  drawer  and  drawee  become  responsible  for  its  pay- 
ment. As  a  salable  instrument  it  is  double-name  paper. 
Its  acceptance  makes  it  a  written  evidence  of  debt  the 


32  MERCANTILE  CREDIT 

same  as  a  promissory  note.  Without  being  accepted  a 
bill  is  not  a  credit  instrument.  It  is  simply  a  request 
of  one  person  upon  another  to  pay  a  cum  of  money. 
However,  bills  not  accepted  are  frequently  sold  as  re- 
sponsibility for  them  rests  with  the  drawer. 

In  England1  a  distinction  is  made  between  a  bill  of 
exchange  and  a  draft.  Only  bills  that  are  "accepted" 
are  drafts.  All  others  are  bills  of  exchange.  Bills  of 
exchange  often  mean  foreign  bills,  while  acceptances 
are  domestic  or  inland  bills.  However,  bills  of  exchange 
are  ordinarily  included  to  cover  both  "accepted"  bills 
and  those  not  accepted  and  foreign  bills  and  domestic 
or  inland  bills. 

The  commercial  draft  grew  out  of  the  Great  Mediaeval 
Fairs  of  Europe  which  were  centers  for  the  distribution 
of  products.  After  the  period  of  direct  barter,  money 
changers  attended  the  fairs  to  exchange  money  for  the 
traders.  With  the  great  multiplication  of  goods  to  be 
exchanged  and  a  better  organization  of  the  mercantile 
system,  merchants  remained  at  home,  shipped  their 
goods  to  each  other,  and  by  means  of  bills  of  exchange 
they  secured  payment  for  their  goods  with  the  use  of 
but  little  money. 

Bills  of  exchange  have  reached  the  greatest  degree  of 
acceptability  in  England.     Where  in  America 

Use  of  ^le  promissory  note  is  generally  used  pledg- 

bills  of  ...  ,  ,     ,, 

exchange.     m§  ™e  promise  of  the  purchaser  to  the  pay- 
ment  for   a  bill  of  goods  sold   on  time,  in 
England  the  commercial  draft  is  used.     Often  to  these 
1  Journal  of  Accountancy,  Dec,  1911,  p.  601. 


CREDIT  INSTRUMENTS  33 

drafts  bills  of  lading  are  attached  representing  the  prop- 
erty shipped,  which  is  a  pledge  to  the  payment  of  the 
bill.  As  each  succeeding  endorser  is  pledged  to  pay  the 
face  of  the  bill  they  may  pass  through  many  hands  and 
are  considered  relatively  safe  instruments  of  credit. 

The  bill  of  exchange  is  also  used  in  what  is  termed 
accommodation  paper.  A  may  order  B  to  pay  a  certain 
sum  of  money  and  when  B  accepts  it,  A  may  sell  it  to  a 
banking  institution.  B  in  turn  orders  A  to  pay  a  cer- 
tain sum  of  money  and  as  soon  as  A  accepts  it,  B  can 
dispose  of  it  to  a  banking  institution.  This  is  known 
as  accommodation  paper.  Other  forms  of  bills  of  ex- 
change are  not  subjects  for  discussion  here.  The  two 
sorts  of  transactions,  however,  represent  the  purposes 
for  which  bills  of  exchange  are  made  out. 

Aside  from  the  promises  to  pay  and  the  orders  to  pay 
other  credit  instruments  are  bills  of  lading  and  warehouse 
receipts. 

The  bill  of  lading  is  an  itemized  statement  of  goods 
shipped,  and  it  gives  the  purchaser  or  the  one  to  whom 
the  goods  are  shipped,  a  right  to  them.     The 
bill  of  lading  is  both  a  receipt  and  a  contract.         .  d. 
It  is  a  receipt  given  by  the  transportation 
company  acknowledging  the  acceptance  of  goods  and  it 
is  also  a  contract  between  the  transportation  company 
and  the  shipper  stipulating  the  terms  and  manner  of 
shipment  and  the  carrier's  responsibility.     As  the  bill 
of  lading  is  a  right  to  certain  specified  goods,  it  is  a  sale- 
able credit  instrument  and  may  be  transferred  frequently, 
and  as  often  as  it  is  sold,  the  goods  called  for  by  the  bill 


34  MERCANTILE  CREDIT 

of  lading  change  hands.  As  it  is  a  favorite  collateral  for 
loans  from  banks,  it  is  not  only  used  to  facilitate  the  sale 
of  goods  but  as  a  basis  of  credit  pending  their  sale. 

The  bill  of  lading  is  often  an  instrument  used  in  the 
collection  of  accounts.  In  shipping  a  bill  of  goods  the 
seller  often  attaches  a  commercial  draft  to  the  bill  of 
lading  with  the  understanding  that  the  latter  is  to  be 
delivered,  together  with  the  right  to  the  goods  only 
when  the  draft  is  paid. 

The  bill  of  lading  is  used  as  collateral  to  secure  the 

advancement  of  funds  especially  in  cases  of  standardized 

products  such  as  wheat,  cotton,  coffee,  etc. 

Uses  of        Local  buyers  of  grain  are  without  much  cap- 

the  bill  of  . 

lading.         ital  and  to  do  an  extensive  business  they  must 

secure  advancements  of  funds  from  commis- 
sion men  who  buy  from  them,  or  from  their  local  banks. 
A  favored  way  of  securing  advancements  when  grain  is 
shipped,  is  to  attach  to  a  bill  of  lading  a  draft  written 
against  the  commission  man  and  deposit  them  with  the 
local  banker  who  will  advance  funds  which  are  used  in 
buying  more  grain.  When  grain  is  again  shipped  from 
the  interior  market  to  the  seaboard,  the  shipper  secures 
a  bill  of  lading  from  the  vessel  or  railway  company, 
draws  a  draft  against  the  consignee  and  deposits  the 
draft  and  bill  of  lading  with  the  bank  and  has  funds 
advanced.  The  cycle  of  transactions  of  this  class  is 
completed  when  the  exporter  draws  a  draft  against  the 
foreign  purchaser  and  attaches  to  it  the  steamship  bill 
of  lading  and  the  insurance  policy  on  the  cargo  and  takes 
them  to  his  banker  and  sells  the  bill. 


CREDIT  INSTRUMENTS  35 

The  warehouse  receipt  performs  practically  the  same 

function  as  an  instrument  of  exchange  and  as  a  credit 

instrument    to    secure    the    advancement    of 

funds,  as  the  bill  of  lading.     It  is  a  receipt         Ware- 
house 
for  goods   classified   and   placed  in   a   ware-        receipt. 

house.  The  purchaser  of  many  classes  of 
farm  products  exchanges  funds  for  a  warehouse  receipt 
which  entitles  him  to  the  possession  of  the  goods  depos- 
ited. Goods  are  sold  through  a  disposition  of  the  ware- 
house receipt.  When  sold  the  warehouse  receipt  must 
be  endorsed  the  same  as  a  promissory  note,  check,  or 
other  instrument  of  credit.  It  is  also  used  frequently 
as  collateral  for  the  advancement  of  funds.  With  the 
increased  tendency  to  classify  and  to  standardize  ware- 
house products,  it  becomes  to  a  greater  extent  both  a 
negotiable  instrument  and  collateral  for  the  advance- 
ment of  funds. 

Contracts  for  the  delivery  of  grain  are  usually  ful- 
filled by  a  tender  of  warehouse  receipts.1  "The  receipt 
states  the  name  of  the  elevator  company  issuing  it,  the 
date  of  issue,  the  kind  and  amount  of  grain,  and  the  name 
of  the  owner."     When  sold  the  receipts  are  endorsed. 

Terminal  elevator  companies  buy  large  quantities  of 

grains  and  to  carry  on  their  buying  operations 

they  are  heavy  borrowers  of  banks.     To  pro- 

.  warehouse 

cure  loans  elevator  receipts  are  deposited  as    reCeipts. 

collateral.     They  are  considered  safe  collat- 
eral and  where  the   market  is  stable  bankers  advance 

1  "American  Produce  Markets,"  Annals  of  American  Academy 
of  Political  and  Social  Science,  p.  39. 


36  MERCANTILE  CREDIT 

funds  to  90  per  cent,  of  the  value  of  the  receipts.  When 
the  grain  is  sold  the  loans  are  paid  and  the  receipts  are 
surrendered.  All  others  engaged  in  purchasing  grain 
secure  the  advancement  of  funds  from  banks  by  de- 
positing warehouse  receipts  with  them. 


CHAPTER  III 

KINDS  OF  CREDIT 

Depending   upon   the   basis   of   classification   credit 

may  be  classified  in  a  variety  of  ways,  and  each   class 

may  be  divided  into  many  sub-heads.      We  may  group 

all   classes  of  credit  under  two  main  heads, 

public  and  private  credit.     From  the  point    Basis  of 

classifica- 
of  view  of  the  use  of  funds  credit  may  be    tion> 

divided  into  productive  and  consumptive 
credit  and  to  these  may  be  added  a  third,  public  credit, 
which  is  in  part  productive  and  in  part  consumptive 
credit.  Upon  the  basis  of  the  personality  of  the  bor- 
rower credit  may  be  divided  into  individual  credit  and 
corporate  credit.  In  the  above  suggested  classification 
each  of  the  main  divisions  of  credit  may  be  divided  into 
many  subheads. 

Upon  the  basis  of  the  conditions  affecting  credit, 
credit  may  be  divided  into  five  kinds:1  mercantile,  per- 
sonal, banking,  public  and  investment  credit.  This 
classification  will  be  used  in  the  present  treatise.  While 
no  hard  and  fast  lines  can  be  established  between  different 
kinds  of   credit,  it   is  believed  that  this  classification 

1  Prendergast  divides  credit  into  the  same  five  classes  [Pren- 
dergast:  Crtdit  and  Its  Uses.]  Galloway  divides  credit  into  four 
classes,  Personal,  Mercantile,  Business  and  Banking  Credit.  [See 
Adcertising,  Selling  and  Credits  in  the  "Modern  Business  Series."] 

37 


38  MERCANTILE  CREDIT 

serves  a  useful  end  in  describing  the  uses  and  purposes  of 
credit.  This  chapter  represents  an  attempt  to  describe 
the  last  three  classes  and  to  explain  their  relation  to 
mercantile  credit,  while  a  discussion  of  personal  and 
mercantile  credit  is  reserved  for  subsequent  chapters. 

Mercantile  credit  is  the  power  to  secure  goods  for 
purposes  of  sale  in  return  for  an  equivalent  promised  in 
the  future,  and  a  mercantile  credit  transac- 
~      tion  consists  of  an  exchange  of  goods  for  a 
promised    equivalent.     A   sale   of   goods    on 
time  is  a  mercantile  loan.     Wholesalers,  jobbers,  com- 
mission men  and  retailers  deal  in  mercantile  credit,  as 
sellers  are  frequently  compelled  by  business  practice  to 
give  time  for  the  payment  of  goods  from  the  proceeds 
of  their  sale. 

Personal  or  individual  credit  is  the  power  to  secure 
something  valuable  in  the  present  in  exchange  for  some- 
thing promised  in  the  future.     It  is  some- 
..  times    known    as     consumptive     credit,     as 

personal  credit  is  obtained  at  present  chiefly 
for  purposes  of  consumption,  but  in  this  discussion 
personal  credit  not  only  includes  consumptive  credit 
but  also  the  credit  which  enables  individuals  and  partner- 
ships   to    secure    capital    for    purposes    of   production. 

BANKING  CREDIT 

Banking  credit  is  the  power  of  a  banking  institution 
to  obtain  something  of  value  in  the  present  in  exchange 
for  its  promise  to  pay.     In  the  case  of  a  simple  de- 


KINDS  OF  CREDIT  39 

posit  the  bank  exchanges  its  promise  to  pay  in  the  form 

of  a  certificate  of  deposit  or  a  book  credit  for  funds  or 

a  title  to  funds.     Because  the  bank  is  required 

to  pay  money  in  the  future,  this  transaction       Banking 

credit 
is  often  termed  a  "short  sale"  of  money.     In        defined. 

other  instances  which  arise  in  the  ordinary 

work  of  Commercial   Banks,   the   bank   exchanges   its 

credit  for  the  credit  of  persons  or  associations. 

The  three  primary  functions  of  a  bank  are  those  of 
deposit,  discount  or  loan,  and  note  issue.  The  early 
bankers  were  money  changers,  who  exchan-  Bankmg 
ged  one  form  of  money  for  another  either  do-  functions 
mestic  or  foreign.  Perhaps  the  next  function  *"  early 
assumed  by  banks  after  money  changing,  was 
to  pay  a  given  amount  to  some  one  else  in  another 
place.1  To  do  this  work,  it  was  necessary  to  have 
correspondents  in  other  places  on  whom  orders  to  pay 
were  drawn.  This  function  was  assumed  by  bankers  in 
Babylonia,  Greece  and  Rome.  The  next  step  toward 
the  modern  banking  system  consisted  in  receiving  de- 
posits for  which  receipts  were  given,  the  depositor  being 
permitted  to  withdraw  his  funds  upon  presentation  of 
his  receipt.  He  was  also  permitted  to  order  his  banker 
to  pay  to  a  third  person  all  or  a  part  of  the  amount  de- 
posited. This  method  of  banking  was  prevalent  in 
Babylonia  as  well  as  in  the  mediaeval  states  of  Europe. 
A  transfer  of  funds  from  the  credit  of  one  person  to  an- 
other on  the  books  of  the  bank  was  permitted  by  the 
leading  banking  institutions  of  mediaeval  Europe.     At 

1  Seligman:  Principles  of  Economics,  p.  525. 


40  MERCANTILE  CREDIT 

first  the  transfer  could  be  made  only  by  word  of  mouth 
in  the  presence  of  both  parties  but  later  the  transfers 
were  made  by  written  order  or  draft  by  the  depositor 
upon  the  banking  institution. 

The  loaning  of  funds  deposited  with  banks  for  pur- 
poses of  safe  keeping  was  at  first  considered  incompatible 

with  the  proper  custodial  care  of  people's 
Functions  fun(js>  However,  the  functions  of  money 
banks.  lending  and  deposit  banking  became  common 

in  Greece  and  Rome  as  well  as  in  Mediaeval 
Europe.  The  bank  of  Amsterdam  was  perhaps  the 
first  to  advance  money  upon  deposits  of  coin  or  bullion, 
the  latter  to  be  given  to  the  owner  upon  the  return  of 
the  money  advanced.  By  degrees  advancements  were 
made  upon  the  deposit  of  other  things,  the  funds  or 
wealth  deposited  guaranteeing  the  return  of  money  ad- 
vanced by  the  bank.  As  an  outgrowth  of  this  develop- 
ment we  have  to-day  such  specialized  institutions  as  the 
agricultural  and  mortgage  banks  of  Europe,  and  the 
bond  and  mortgage  companies  and  other  closely  related 
institutions  of  the  United  States.  The  acceptance  of 
collateral  by  commercial  banks  to  guarantee  the  payment 
of  loans  is  a  modern  safeguard  corresponding  to  the 
advancement  of  money  based  upon  deposits  of  bullion 
of  the  mediaeval  bank. 

The  conditions  under  which  banks  lend  do  not  come 
Founda-  directly  under  the  head  of  banking  credit,  or 
tions  of  the  power  of  banks  to  secure  advances  of 
banking       funds  in  exchange  for  their  promises  to  pay. 

But  as  the  power  of  banks  to  command  the 


KINDS  OF  CREDIT  41 

confidence   of   the   business  community,  and  also   the 

funds  of  the  community,  depends  almost  entirely  upon 

the   caution   and   judgment  of  banks   in   lending  their 

funds,  it  seems  appropriate  to  consider  the  conditions 

under  which  banks  lend  their  credit. 

As  contrasted  with  the  earlier  banking   institutions, 

credit  creation  is  the  distinctive  feature  of  the  modern 

banks.     The  bank  loans  not  alone  its  money 

but  its  credit.     In  the  regular  routine  of  bank- 
s' creation. 

ing  in  the  great  majority  of  cases  when  a  loan 
is  made,  cash  is  not  paid  out  to  the  borrower,  but  he  is 
given  a  credit  account  on  the  books  of  the  bank.  Like- 
wise, when  the  loan  is  paid,  the  banker  simply  charges 
the  amount  against  the  borrower's  account.  In  our 
modern  methods  of  business  but  little  cash  is  used,  the 
great  bulk  of  payments  being  made  in  checks  or  drafts 
against  an  account  in  a  bank.  Because  of  this,  when 
business  men  borrow  from  a  bank  they  do  not  want  cash 
but  a  deposit  account  which  they  can  draw  on  by  checks 
when  they  make  their  payments.  Business  men  thus 
leave  nearly  all  their  funds  with  banks  because  it  is  to 
their  interest  to  do  so.  Since  banks  enjoy  the  con- 
fidence of  the  business  community  to  such  an  extent  as 
to  retain  as  deposits  in  large  measure  the  funds  loaned 
as  well  as  other  deposits  left  with  the  bank,  it  can  loan 
to  a  far  greater  extent  than  its  capital  and  deposits  com- 
bined. It  is  by  this  method  of  credit  creation  that  the 
bank  earns  its  chief  income  and  performs  its  greatest 
social  service.  Experience  shows  that  not  all  who  have 
claims  against  a  bank  will  present  them  at  once,  and  that 


42  MERCANTILE  CREDIT 

in  ordinary  times,  a  bank  needs  to  keep  but  one-fourth 
or  one-fifth  of  its  obligations  in  its  vaults  for  redemption 
purposes.  This  means  that  by  use  of  its  credit  with  a 
given  amount  of  funds  a  bank  can  lend  several  times  as 
much  as  any  individual. 

Mercantile  credit  and  banking  credit  are  mutually 
dependent.  Mercantile  credit  transactions  give  rise  to 
the  great  bulk  of  banking  credit  and  banking 
between  credit  supports  and  makes  possible  mercan- 
mercantile  tile  credit.  When  goods  are  sold  by  manu- 
and  bank-  facturers,  jobbers  or  other  middlemen  on 
ing  ere  thirty,  sixty,  or  ninety  days  time,  the  seller 
usually  accepts  a  promissory  note  from  the  buyer  as  a 
pledge  of  payment,  or,  as  is  the  usual  case  in  the  British 
Isles,  he  writes  a  bill  or  draft  ordering  payment  which  the 
buyer  accepts.  These  notes  or  drafts  are  taken  to  the 
commercial  bank  and  discounted.  In  other  words, 
these  promises  to  pay,  the  evidences  of  the  mercantile 
loan,  are  sold  to  the  commercial  bank,  the  latter  advanc- 
ing the  funds,  or  in  other  words,  making  a  loan  to  middle 
men  to  cover  the  value  of  the  goods  sold.  The  loan 
function  of  the  bank  is  ordinarily  called  the  "discount 
function"  as  the  great  majority  of  its  loans  are  made  by 
discounting  notes,  drafts,  or  other  paper  which  come  into 
being  in  the  ordinary  course  of  business  of  which  the 
above  is  typical.  It  is  obvious  that  the  mercantile  loan 
gives  rise  to  a  large  volume  of  banking  loans.  However, 
if  it  were  not  for  bank  loans,  mercantile  loans  would  be 
greatly  restricted.  Time  is  given  frequently  by  the 
manufacturer,   jobber,   etc.,    because    they    know  that 


KINDS  OF  CREDIT  43 

they  can  take  the  notes  of  the  buyer  to  the  commercial 
bank  and  have  them  discounted.  The  great  majority 
of  mercantile  houses  have  not  an  adequate  supply  of 
capital  to  carry  on  an  extensive  loan  business  wthout 
the  aid  of  banking  institutions,  and  it  was  for  the  pur- 
pose of  rendering  this  and  similar  functions  that  the 
modern  commercial  bank  was  developed.  Mercantile 
credit  is  thus  fostered  and  supported  by  banking  credit. 

When  the  merchant  sells  to  a  bank  the  promissory  note 
of  the  purchaser  of  his  goods  endorsed  by  himself,  the 
banker  subtracts  from  the  face  of  the  note  the  interest 
for  the  time  the  note  is  to  run,  and  either  gives  the 
merchant  the  present  value  of  the  note  in  money,  or 
gives  him  credit  for  the  amount  on  the  books  of  the 
bank.  Where  money  is  paid,  the  bank  exchanges  a 
present  value  for  the  promise  to  pay  in  the  future.  This 
transaction  involves  banking  credit  only  in  the  sense 
that  the  bank  is  a  giver  of  credit.  In  the  other  case, 
where  the  merchant  is  given  credit  on  the  books  of  the 
bank  for  the  amount  due  him,  banking  credit  is  ex- 
changed for  mercantile  credit.  The  bank  exchanges  its 
promise  to  pay  for  the  credit  instrument  which  the  pur- 
chaser of  goods  gave  to  the  seller. 

Individual  or  personal  credit  is  related  to  banking 
credit  in  a  similar  way.     Individuals  who  en- 
joy  a    good  credit  reputation  may  borrow    0f  banking 
money  from  a  bank.     If  the  bank  pays  the    credit  to 

money  directly  to  the  borrower  in  exchange    Personal 

credit* 
for  his  promissory  note,  banking  credit  is  in- 
volved in  the  transaction  only  in  the  sense  that  the  bank  is 


44  MERCANTILE  CREDIT 

a  giver  of  credit.  Upon  the  other  hand,  if  the  borrower 
of  the  money  leaves  it  on  deposit  in  the  bank,  which  is 
the  usual  case,  then  the  bank  exchanges  its  promise  to 
pay  for  the  promise  to  pay  of  the  borrower,  in  which 
case  banking  credit  is  exchanged  for  personal  credit. 

In  some  respects  banking  credit  is  the  highest  form 

of  credit,  for  the  standards  set  by  banking  institutions 

are,  and  should  be,  above  those  of  any  other 

Banking  individual  or  institution  giving  credit.  In 
credit  sets 

standards.  the  very  na^ure  °f  things,  a  bank  should 
enjoy  the  fullest  confidence  of  the  public. 
If  it  does  not,  its  service  is  at  an  end.  As  it  has  custodial 
care  of  the  funds  of  the  community,  the  people  desire  to 
be  certain  of  getting  their  money  when  they  want  it,  or 
when  the  obligation  of  the  bank  to  pay  them,  matures. 
When  a  merchant  buys  a  bill  of  goods  on  sixty  days'  time, 
if  he  is  unable  to  pay  the  note  when  due  he  may  ask  for 
an  extension  of  time,  which  the  seller  may  be  willing  to 
grant  or  be  compelled  to  grant  for  practical  reasons. 
In  personal  credit  too,  borrowers  may  be  unable  to  pay 
notes  when  due  and  their  requests  for  an  extension  of 
time  are  frequently  granted.  But  a  banking  institution 
cannot  ask  for  extensions  of  credit;  it  must  meet  its 
obligations  as  they  mature  or  close  its  doors  and  admit 
its  failure  as  an  institution  of  credit. 

Since  a  bank  makes  its  chief  income  by  loaning  its 
credit,  and  as  its  loans  are  usually  several  times  in  excess 
of  the  funds  in  the  bank  to  redeem  them,  and  further- 
more, as  it  must  close  its  doors  the  moment  it  confesses 
its  inability  to  meet  its  obligations,  it  is  imperative  that 


KINDS  OF  CREDIT  45 

it  should  exercise  the  greatest  caution  in  lending.     It 

is  limited  to  short-time  loans,  that  is,  call  loans,  and 

loans  for  thirty,  sixty,  and  ninety  days.     Where  loans  are 

made  to  persons,  most  banks  limit  their  purchases  to 

"double    name"     and    "triple    name"    paper.     When 

"single  name"  paper  is  purchased,  the  borrower  must  be  a 

man  of  ready  means  who  is  certain  to  have  funds  ready  as 

his  note  matures.     Where  a  loan  is  based  on  a  sale  of 

goods,  the  paper  purchased  is  almost  invariably  "double 

name"   paper,  as  the  purchaser  gives  his  note  to  the 

seller  and  the  latter,  before  selling  it  to  a  bank,  must 

endorse  it. 

Accommodation  paper  is  also  "double  name"  paper. 

In  this  case  would-be  borrowers  exchange  their  notes 

or  bills,  take  them  to  their  respective  banks, 

affix  their   own  signatures,   and   banks   buy      Accom- 

u  modation 

them  as     double  name"  paper.     Much  has      paper. 

been  said  of  the  inferiority  of  such  loans  as 

contrasted  with  those  based  upon  a  sale  of  goods.     While 

the  latter  class  of  loans  is  superior  to  the  former,  its 

superiority    has    been    greatly  exaggerated.     Since  the 

sale  of  goods  gave  rise  to  the  loan,  and  although  the 

maker  of  the  note  is  supposed  to  pay  it  from  the  sale 

of  the  goods,  and  often  does  so,  no  property  is  pledged 

for  the  payment  of  the  note  and,  as  will  hereafter  be 

shown,  several  notes  are  often  written  based  upon  the 

sale  of  one  lot  of  goods.     Loans  made  for  consumption 

purposes,  as  is  often  the  case,  clothe  the  borrower  with 

no  power  whatever  to  pay  them  when  due.     In  either 

case,  however,  much  depends  upon  the  ability  of  the  bor- 


46  MERCANTILE  CREDIT 

rowers  to  pay  their  debts  and  upon  the  habits  of  the 
borrowers  in  debt  payment. 

Often  the  deposit  of  collateral  consisting  of  shares  of 

stock  or  bonds  is  required  as  a  pledge  of  payment  of 

notes.     The    safest     collateral     accepted    is 

..        .      that  which  is  quoted  on  the  Exchange  as  it 

may  be  sold  at  once  and  the  loans  paid. 
Commercial  banks  often  have  regular  credit  depart- 
ments to  pass  judgment  on  the  value  of  titles  to  prop- 
erty submitted  as  pledges  to  loans,  and  also 

^      xt  to  pass  judgment  on  the  worthiness  of  bor- 

depart- 

ments.         rowers.     Business    houses  are  often  granted 

lines  of  credit  which  permit  them  to  borrow 
from  the  bank  up  to  a  certain  limit.  These  lines  of 
credit  are  granted  after  a  thorough  investigation  of  the 
credit  standing  of  houses  seeking  credit. 

The  interest  charged  by  banks  is  relatively  low,  as  the 
terms  are  for  short   periods   and   as   great   caution   is 

exercised  to   avoid   risks.     This  means  also 

that  banks  give  very  low  rates  for  the  money 

they  borrow. 


Interest 
rates. 


PUBLIC  CREDIT 

Public  credit  has  no  immediate  relation  to  mercantile 

credit,  and  only  a  brief  consideration  will  be 

,.1C  ,        given  to  it.     It  is  the  power  of  government — 
credit  de-  .  .  . 

scribed.        national,  state,  or  lesser  political  division — 

to  secure  funds  in  exchange  for  its  promise 

to  pay  in  the  future.     Its  chief  instrument  of  credit  is  a 


KINDS  OF  CREDIT  47 

government  bond,  which  is  a  promissory  note  of  the  gov- 
ernment sold  to  purchasers;  or,  in  other  words,  it  is  ex- 
changed by  the  government  for  funds  advanced  by  indi- 
viduals. In  some  instances  a  special  class  of  property,  or 
the  income  from  specified  property,  is  pledged  to  pay  the 
loan,  while  in  other  cases  the  lender  depends  exclusively 
on  the  faith  of  the  government  to  pay  the  obligation. 
These  loans  are  the  typical  long-time  loans,  and  the 
interest  rates  are  low  where  the  governments  are 
stable.  Where  governments  are  insecure,  the  interest 
rates  are  higher,  varying  with  the  insecurity  of  the 
government. 

Another  type  of  the  public  debt  is  the  floating  loan, 
which  is  frequently  a  forced  loan.  In  time  of  war,  when 
armies  are  in  the  field,  it  is  often  necessary  to 
secure  loans  of  provisions  and  equipment  from  .  oa  ing 
the  section  of  the  country  over  which  the  army 
passes.  Certificates  of  indebtedness  are  issued  by  army 
officials  which  are  exchanged  for  these  things,  and  are 
usually  redeemed  at  the  close  of  the  war. 

At  times  governments  resort  to  their  promissory  notes, 
or  government  paper  money,  which  are  given  general  cir- 
culation when  governments  pay  their  obliga- 
tions.    These  are  convertible  or  inconvertible, 

»         money. 

depending  on  whether  the  government  pledges 
anything  to  redeem  them  or  not.  Lesser  political  divi- 
sions are  usually  denied  the  privilege  of  paying  their 
debts  by  issuing  paper  money.  The  propriety  of  resort- 
ing to  this  method  of  borrowing  by  governments  is  not  a 
subject  for  consideration  here. 


48  MERCANTILE  CREDIT 

The  chief  causes  of  public  debts  are  war  expenditures, 

and  public  improvements.     Until  recently  governments 

borrowed  chiefly  to  defray  the  expenses  of  war. 

Causes  of     now  these   are   declining   in   importance  in 

public  .  - 

debts.  comparison  with  expenditures  for  industrial 

improvements  and  other  public  improvements 

of  a  constructive  character. 


INVESTMENT  CREDIT 

The  fourth  division,  investment  credit,  or  capital 
credit,  as  it  is  sometimes  called,  is  represented  by  real 
What  in-  estate  investments  consisting  of  bonds  and 
vestment  mortgages,  bonds  and  shares  in  public  service 
credit  in-  utilities,  bonds  and  shares  in  general  industrial 
securities,  and  shares  in  banking  and  in  trust 
companies.  Investment  or  capital  credit  is  a  long-time 
loan.  In  investment  credit,  the  corporation  or  business 
receives  funds  from  individual  investors  in  exchange  for  a 
title  to  property.  The  term  investment  credit  expresses 
the  point  of  view  of  the  lender,  as  loans  are  made  purely 
for  purposes  of  investment.  An  investigation  of  invest- 
ment credit  would  take  us  into  the  entire  field  of  the 
money  market  and  of  speculation,  but  our  purpose  is 
simply  to  state  what  it  is,  explain  its  nature  and  its 
relation  to  mercantile  credit. 

Until  a  few  decades  ago,  capital  was  invested  in 
business  enterprises  by  those  who  assumed  directly  the 
management  of  business  with  the  hope  of  making  good 
profits  on  their  successful   management.      Since  then, 


KINDS  OF  CREDIT  49 

with  the  development  of  corporations,  and  especially 

those  on  a  large  scale,  a  great  deal  of  the  capital  invested 

in  business  is  contributed  by  those  who  are  _     . 

Business 

not  active  participants  in  business,  but  who  0rganiza- 

advance  the  capital  with  the  hope  of  making  tion  and 

only  fair  profits.      This  so-called  general  in-  irivestment 

.    .  ...  ,1       credit, 

vestor  is  increasing  in  importance  now,  and  by 

all  odds  the  largest  portion  of  capital  is  invested  by  men 
of  this  class.  In  the  single  entrepreneur  system  large- 
scale  production  with  its  advantages  was  impossible. 
With  the  partnership  organization,  the  business  unit  could 
command  a  larger  amount  of  capital,  but  disadvantages 
of  the  partnership  organization  prevented  it  from  becom- 
ing the  prevailing  form  of  organization  for  large  undertak- 
ings. The  corporation  became  the  most  advantageous 
institution  for  large  units  of  production. l  It  could  attract 
capital  from  a  great  variety  of  investors  because  (1)  they 
are  not  responsible  for  the  obligations  of  the  corporation 
beyond  the  amount  of  their  subscribed  stock,  (2)  they  can 
buy  shares  in  small  amounts,  and  (3)  they  can  withdraw 
from  the  corporation  at  any  time  by  selling  their  stock  at 
its  market  value.  Moreover,  the  corporation  has  an 
advantage  from  the  point  of  view  of  organization,  as 
it  is  relatively  stable  and  permanent  and  it  can  concen- 
trate its  executive  management  in  a  few  very  competent 
men. 

The  railroad  business  in  the  United  States  which  rep- 
resented the  first  great  demand  for  large  scale  production 
and  consequently  for  the  corporation  form  of  organiza- 

1  See  Ely:  Outlines  of  Economics,  p.  148. 


50  MERCANTILE  CREDIT 

tion,  finds  the  corporation  in  almost  exclusive  control 
to-day.  Corporations  produce  nearly  three-fourths  the 
Extent  of  total  product  in  manufacturing  industry  and 
invest-  an  increasing  number  of  mercantile  establish- 
ment ments  are  corporations.  Nearly  all  banks, 
credit.  .  -,    , 

insurance  and  trust  companies  are  corpora- 
tions. Nearly  all  municipal  utilities  under  private  con- 
trol, are  also  corporations. 

The  property  of  corporations  is  in  the  form  of  stocks 
and  bonds.     Bonds  give  their  holders  a  preferred  claim 

to  the  assets  of  the  company  and  the  interest 

Stocks 

...      on  them  must  be  paid  regularly.     There  are 

several  kinds  of  bonds  depending  upon  the 
character  of  the  guarantee  of  the  funds  loaned.  The 
stock  is  divided  into  common  and  preferred  shares, 
although  many  corporations  do  not  issue  the  latter. 
The  preferred  stock  when  issued  has  usually  a  prior  claim 
over  the  common  both  to  assets  of  the  business  and  to 
earnings,  and  in  such  cases  dividends  cannot  be  declared 
until  the  holders  of  preferred  stock  are  paid  their  interest 
in  full.  A  further  discussion  of  the  investments  in  cor- 
porations is  not  warranted  by  the  limits  of  the  present 
chapter. 

From  the  point  of  view  of  the  investor,  investment 
credit  and  public  credit  are  identical.  Both  are  long 
Invest-  time  loans  and  upon  each  is  realized  usually 
ment  and  a  low  rate  of  interest.  Both  appeal  to  practi- 
public  cally  the  same  class  of  investors.     But  from 

the  standpoint  of  the  agency  enjoying  the 
credit  the  two  kinds  are  different.     In  public  credit  the 


KINDS  OF  CREDIT  51 

lender  buys  bonds  when  he  believes  that  the  government 
is  willing  to  pay,  and  has  resources  sufficient  to  enable 
it  to  pay  its  obligations.  In  capital  credit  the  investor 
buys  bonds  or  stocks  when  he  believes  that  the  business 
is  sufficiently  profitable  to  enable  it  to  pay  its  debts. 
Because  the  securities  of  many  kinds  of  capital  credit 
fluctuate  in  value,  many  investors  are  attracted  to  this 
class  of  property  by  the  hope  of  its  appreciation  in 
value. 

Mercantile  credit  is  radically  different  from  invest- 
ment credit.     As  the  former  is  a  short-time  loan,  the  rate 

of  interest  is  usually  high,  the  loan  is  made     _ 

J       °  Invest- 

not  as  an  investment  but  because  the  sale  of     ment  and 

goods  upon  which  the  profits  of  the  merchant     mercan- 

are  made,  requires  the  loan.     Upon  the  other     fale 

credit, 
hand,  the  power  to  command  credit  by  insti- 
tutions in  investment  credit  and  in  mercantile  credit 
arises  from  a  very  different  set  of  forces. 

Ordinarily  investments  in  real  estate  mortgages  are 
the  safest  long-time  loans  of  investment  credit.     The 
investments  of  building  and  loan  associations 
are  in  this  class  of  property,  and  as  the  loans    invest_ 
are  for  considerably  less  than  the  value  of  the    ment 

property,  they  are  considered  safe.     The  secu-    credlt 

.  .      .     ,       i  ■  -i  •  compared, 

rities  in  banks,  trust  companies,  and  insurance 

companies  are  considered  a  safe  investment,  but  of 
course  here  much  depends  upon  the  character  of  the  in- 
stitution. Of  the  investments  in  public  service  utilities, 
those  in  railway  stocks  and  bonds  are  perhaps  now  the 
safest.     However,  in  the  early  history  of  railway  develop- 


52  MERCANTILE  CREDIT 

mentin  this  country  these  were  considered  an  unsafe  in* 
vestment.  The  investments  in  municipal  utilities  such  as 
the  securities  of  street  railways,  telephone,  waterworks, 
gas  and  electric  lighting  companies  are  more  or  less  pre- 
carious, as  it  is  difficult  to  find  out  the  values  of  the  prop- 
erty of  the  companies,  the  capacity  of  the  companies  to 
carry  on  a  successful  business,  and  ultimately  the  ability 
of  the  companies  to  pay  at  maturity.  Stocks  and  bonds 
in  these  companies  fluctuate  frequently,  and  individuals 
who  make  such  loans  take  chances.  More  uncertain 
than  loans  to  public  service  companies  are  loans  to 
general  industrial  enterprises.  The  status  of  the  com- 
panies engaged  in  industrial  enterprises  is  difficult  to 
discover,  and  on  that  account  this  sort  of  investment  or 
loan  is  more  precarious.  The  so-called  industrial  secu- 
rities as  investments  have  arisen  to  importance  in  recent 
years,  as  may  be  seen  from  the  fact  that  nearly  one-half 
the  property  listed  on  the  New  York  Stock  Exchange 
is  of  this  character. 

The  funds  to  carry  on  the  above-named  enterprises 
come  from  a  variety  of  sources,  and  each  sort  of  an  in- 
vestment has  its  respective  interests.  Those  who  are 
required  to  make  safe  investments  at  low  rates  will  seek 
of  course  the  safer  investments.  There  is  an  opportun- 
ity, however,  in  investment  credit  for  people  of  varying 
grades  of  speculating  instincts.  The  chief  support  of 
these  investments  is  coming  now  from  business  men  who 
have  funds  to  invest  and  do  not  care  to  manage  business 
directly  themselves.  Such  investors  canvass  the  money 
market  carefully,   and  distribute  their  investments  in 


MERCANTILE  CREDIT  53 

such  a  way  as  to  yield  a  fair  profit  without  taking  too 
great  a  risk.  These  investors  expect  a  lower  rate  of 
interest  than  when  they  manage  a  business  themselves 
in  which  they  have  invested  all  of  their  wealth  and  lose 
all  they  have  in  event  of  failure. 


CHAPTER  IV 

MERCANTILE  CREDIT 

Mercantile  credit  is  the  power  to  secure  goods  for 
purposes  of  exchange  in  return  for  a  valuable  considera- 
tion promised  in  the  future.     A  sale  of  goods 
Definition     on   ^me   jg    &   mercantile   loan.     Mercantile 
ofmercan-  ,..,,,  ,.  .,■ 

tile  credit.    creo-it  includes  the  credit  given  to  facilitate 

the  distribution  of  products  from  the  time 
they  are  in  a  raw  state  until  they  pass  into  the  possession 
of  the  retailer.  In  this  discussion  the  selling  of  goods 
on  time  by  the  retailer  is  not  considered  a  mercantile 
loan  as  the  goods  in  this  instance  are  usually  purchased 
for  purposes  of  consumption,  and  the  credit  given  is  not 
for  the  purpose  of  facilitating  the  transfer  of  goods. 
However,  this  personal  or  consumption  credit  is  closely 
related  to  mercantile  credit  as  the  soundness  of  the  latter 
depends  in  large  measure  upon  care  exercised  in  giving 
personal  or  consumption  credit. 

From  production  to  consumption  goods  pass  through 
the  following  hands:  the  grower  or  original  producer, 

the  selling  agent  or  broker,  the  manufacturer, 

Classes  of    the  wholesaler,  the  jobber,  and  the  retailer. 

middle 

men.  When  goods  are  imported  the  importer  is  a 

distributer    between    the    manufacturer    and 

wholesaler.     Of  course  the  great  bulk  of  merchandise  is 

not  now  handled  by  all  these  middle  men.     However, 

54 


MERCANTILE  CREDIT  55 

some  products  even  now  are  handled  by  all  of  them  and 
of  those  that  are  not  handled  by  all  these  middle  men, 
some  are  handled  by  some  of  them  and  others  by  other 
middle  men.  The  tendency  now  in  reducing  the  cost  of 
marketing  goods  is  to  eliminate  classes  of  middle  men 
with  the  result  that  the  amount  of  credit  given  to 
market  goods  is  lessened. 

The  grower  or  producer  of  raw  materials  is  frequently 
compelled  to  resort  to  a  loan  to  cover  the  period  inter- 
vening between  the  production  of  goods  and    Who  re_ 
the  time  they  are  sold  or  when  pay  is  received    ceive  mer- 
for  them.     In  the  sale  of  such  products  as    cantile 
grain,  cotton,  etc.,  credit  is  given  as  a  rule  and 
both  the  farmer  and  the  commission  man  receive  ad- 
vances before  funds  are  received  from  the  sale  of  goods. 
The  manufacturer  may  buy  his  raw  material  on  time 
in  which  case  he  receives  a  mercantile  loan.     Again  after 
his  goods  are  manufactured  it  may  be  necessary  for  him 
to  wait  a  limited  period  after  they  are  sold  before  he  re- 
ceives pay  for  them.     The  importers,  the  wholesalers, 
the  jobbers,   the  commission  merchants,   each  in  turn 
often  buy  goods  on  time  thus  receiving  mercantile  loans. 

Merchandise  in  the  hands  of  the  manufacturer  or  the 
mercantile  factors  is  capital,  and  when  it  is 
parted  with  for  a  promise  to  pay  funds  in       ence    f 
the  future,  capital  has  been  loaned  in  as  true      mercan- 
a  sense  as  when  funds  pass  over  the  counters      tile  uP°n 
of  a  bank  in    exchange  for  the  promise  to        an,  ns 
pay  in  the  future.     The  commercial    world 
is    so    organized  that    the    majority   of  the   distribut- 


56  MERCANTILE  CREDIT 

ing  factors  require  the  advancement  of  funds  to  help 
bear  the  expenses  of  handling  and  marketing  goods,  and 
to  cover  the  time  until  payment  is  received  for  goods 
sold.  The  manufacturer  sells  goods  to  the  wholesaler 
on  thirty,  sixty,  or  ninety  days  time,  and  accepts  the 
note  of  the  latter  for  the  amount  of  the  sale  or  writes 
a  bill  against  him.  This  instrument  is  then  frequently 
taken  to  the  manufacturer's  banker  and  is  discounted. 
The  wholesaler  may  sell  to  the  retailer  under  the  above- 
named  conditions,  and  may  also  have  his  banker  dis- 
count the  instrument  of  credit.  In  each  of  the  above 
instances  banking  institutions  are  called  upon  to  advance 
funds  to  support  mercantile  loans,  and  at  these  points 
banking  credit  supplements  and  supports  mercantile 
credit. 

The  most  important  change  introduced  by  the 
modern  methods  of  buying  and  selling  is  the  system 
Mercan-  adopted  by  which  credit  is  given.  In  the 
tile  credit  first  half  of  the  nineteenth  century,  in  the 
sixty  United  States,  when  the  jobbers  and  manu- 

years  ago.  fac^urers  were  visited  by  retailers  twice  a 
year  to  purchase  goods,  they  could  understand  through  a 
personal  acquaintance  of  the  buyer  the  nature  of  the  loan 
given.  Then  the  jobbers  and  manufacturers  were  not 
doing  business  on  so  large  a  scale  as  now,  the  buyers  were 
fewer  in  number  and  the  sales  were  much  less  frequent. 
The  buyers  were  compelled  to  travel  long  distances  over 
inferior  highways  or  by  slow  boats  on  rivers  and  canals, 
and  as  they  purchased  but  twice  a  year  they  were  com- 
pelled to  buy  large  stocks  of  goods  much  of  which  was 


MERCANTILE  CREDIT  57 

unsalable  as  it  was  difficult  to  anticipate  a  season's 
demands  especially  when  the  community  was  a  change" 
able  one.  Goods  were  purchased  on  time,  the  buyer 
giving  his  note  for  the  purchase  which  was  paid  in  six  or 
eight  months  when  he  returned  for  his  next  season's  pur- 
chase. Long  time  credits  were  the  custom  then  owing 
to  the  industrial  conditions  that  could  not  be  avoided 
which  confronted  the  buyers.  Then  as  now,  manufact- 
urers and  jobbers  sold  their  customers'  notes  to  their 
bankers.  In  foreign  trade  long  terms  of  credit  also  pre- 
vailed in  periods  of  slow  vessels  and  of  slow  methods 
of  communication  between  trading  centers. 

The  introduction  and  wide  extension  of  the  railway 
and  the  introduction  of  better  means  of  communication 
by  mail  service,  the  telegraph,  and  telephone 
have  revolutionized  the  methods  of  market-    changes  in 
ing    goods    and    also    the    mercantile    credit    granting 
system.     Whereas  before  the  retailer  had  to    r^eTcan- 
make  long  trips  to  the  market  and  have  his 
goods  shipped  at  great  hazard  over  rough  roads,  the  bet- 
ter means  of  communication  and  transportation  have 
reversed  the  situation  as  it  is  considered  more  advanta- 
geous to  have  the  manufacturer  and  the  jobber  sell  the 
buyer  and  bear  the  risks  of  conveying  the  goods  to  him. 
At  present  the  instances  are  exceptional  where  the  buyer 
and  seller  come  together.     Goods  are  sold  by  traveling 
salesmen  who  visit  the  various  buying  localities,  using 
samples  to  make  their  sales,  or  else  they  are  purchased 
by  the  buyers  through  correspondence  and  not  by  visit- 
ing the  houses  of  manufacturers  and  jobbers  as  formerly. 


58  MERCANTILE  CREDIT 

The  long  term  of  credit  of  from  six  to  twelve  months 
has  given  way  to  the  short  time  loan  of  from  thirty  to 
ninety  days.  Mercantile  agencies  have  developed  to 
make  known  the  credit  standing  of  the  buyer  to  the  seller 
and  the  latter  no  longer  depends  upon  a  personal  inter- 
view with  the  former  to  judge  of  his  credit  standing.  In 
the  large  jobbing  and  manufacturing  institutions  a  de- 
partment has  been  developed  whose  special  function  is 
to  investigate  the  standing  and  character  of  those  seek- 
ing credit  and  to  collect  time  accounts.  In  the  smaller 
institutions  not  of  sufficient  size  to  warrant  the  estab- 
lishment of  a  separate  department,  this  function  is, 
nevertheless,  carefully  performed. 

Our   present   credit   system   grew   out   of   distinctly 
modern  conditions.     Prior  to  the  19th  century  inability 

to   pay   a    debt   was   frequently   a    criminal 
-  offense  and  the  offender  was  thrown  in  prison, 

which  The  state  of  Georgia  was  organized  by  a  col- 

credit  was  ony  of  delinquent  debtors  who  were  given 
2iven  their  liberty  if   they  would   leave  England. 

Virginia  and  other  states  were  largely 
settled  by  indentured  servants — those  who  became,  in  a 
sense,  slaves  to  their  creditors  until  the  obligations  of 
indebtedness  were  removed.  The  farther  we  go  back  in 
history  the  more  rigid  we  find  the  laws  against  debtors. 
Inability  to  meet  an  obligation  as  it  matured  was  con- 
sidered one  of  the  gravest  of  offenses.  The  laws  and 
practices  of  the  early  maritime  cities  of  Italy,  Venice 
and  Genoa,  bear  evidence  of  the  power  of  the  creditor 
class.     The  Shylocks  were  not  merciful.     So    long  as 


MERCANTILE  CREDIT  59 

these  harsh  measures  prevailed  the  giving  of  credit  re- 
quired but  little  judgment,  and  the  development  of  a 
credit  system  was  unnecessary.  The  risk  was  wholly 
the  debtor's  of  assuming  the  responsibility  of  meeting 
an  obligation  at  a  certain  time. 

In  our  present  industrial  era  the  harsh  treatment 
accorded  to  the  debtors  of  two  or  three  centuries  ago 

would    be     absolutely    impossible.     Present 

The 
conditions  make  the  debtor  and  creditor  in  a       granting 

sense  partners  in  enterprise.     Credit  is  given       of  credit 

not  as  a  favor  to  the  debtor  but  with  a  view       at 

ore sent 
to  profit.     The  old  idea  that  the  debtor  owed 

the  creditor  in  law  and  in  fact  is  passing  away.  The 
creditor  investigates  the  character,  ability,  and  financial 
standing  of  the  debtor,  the  nature  of  the  enterprise  in 
which  the  capital  is  to  be  invested,  and  calculates  on  the 
likelihood  of  the  debtor's  being  able  to  meet  his  obliga- 
tions at  maturity.  He  thus  becomes,  in  a  sense,  his 
partner  in  the  business  and  in  event  of  failure  willingly 
accepts  a  cancellation  of  a  portion  of  the  debt,  providing 
that  there  has  been  no  fraudulent  conversion  of  the 
assets. 

The  complicated  organization  of  modern  industry 
requires  credit  giving.  Business  could  scarcely  be  carried 
on  for  a  day  without  it.  The  element  of  chance  seems 
to  play  a  much  more  conspicuous  role  than  when  busi- 
ness organization  was  simple.  The  spirit  of  venture 
finds  no  more  enticing  field  than  in  some  departments 
of  business.  The  success,  too,  of  many  of  our  great 
captains  of  industry  may  be  traced  to  the  taking  of  great 


60  MERCANTILE  CREDIT 

risks.  This  element  of  risk  is  responsible  to  a  large  ex- 
tent for  our  industrial  advancement.  It  is  thus  easy  to 
see  why  credit  giving  should,  in  the  nature  of  things,  be 
considered  a  necessary  part  of  business  transactions  and 
why  the  debtor  who  failed  honestly  should  be  considered 
simply  an  unfortunate  investor. 

The  rise  of  corporations  which  take  the  place  of 
partnerships  introduces  another  change  which  has  its 
reflex  influence  on  credits.  As  long  as  the 
tions  in-  partnership  remains  family  honor  and  family 
fluence  pride  count  for  much  in  avoiding  the  bank- 
the  giving  rUptCy  court.  In  corporations  the  identity 
and  importance  of  the  individual  are  not  con- 
spicuous. "Stockholders  and  managers  of  corporations 
frequently  screen  their  credit  and  honor  behind  joint 
stock  companies,  and  in  event  of  failure  often  pose  as 
unfortunate  investors  in  disastrous  enterprises."  Hence, 
with  this  change  is  introduced  another  reason  for  scruti- 
nizing carefully  the  standing  of  concerns  seeking  credit. 

It  is  extremely  important,  since  credit  plays  such  a 
conspicuous  role  in  industrial  life,  that  it  should  be  on  a 
high  plane.  To  this  end  the  reporting  agencies  have 
been  developed,  credit  and  business  men's  associations 
have  been  organized,  and  the  government  has  thrown 
about  the  creditor  certain  safeguards — all  to  make  it  as 
difficult  as  possible  for  the  debtor  to  be  dishonest,  and  to 
minimize  losses  due  to  mistakes  in  lending. 

As  soon  as  business  was  organized,  so  that  it  was  no 
longer  possible  for  the  seller  to  meet  the  buyer  face  to 
face  and  to  learn  the  nature  of  his  business    standing 


MERCANTILE  CREDIT  61 

directly  from  him,  agencies  were  organized  to  investi- 
gate the  standing  of  those  seeking  credit.  Now  they  are 
absolutely    essential    to    credit   giving.      No 

merchant  would  think  of  granting  credit  with-    bources  ° 

,  credit  in- 

out  investigating    the  standing  of  the  buyer    formation. 

as  reported  by  the  agencies.  All  dealers  are 
consulted  once  or  twice  a  year  by  the  representatives 
of  the  commercial  agencies  for  desired  information  for 
the  purpose  of  establishing  their  rating,  and  if  the 
information  is  unsatisfactory,  others  are  consulted. 
When  goods  are  sold  by  a  traveling  salesman  to 
some  new  firm,  the  house,  before  shipment,  investigates 
the  standing  of  the  firm  as  reported  by  Bradstreet  or 
Dun  or  other  agency.  If  the  report  is  not  altogether 
satisfactory  the  attorney  of  the  company  in  the  locality 
investigates  his  standing.  The  advice  of  the  banking 
institutions  with  whom  the  debtor  deals  is  always  con- 
sidered important.  Other  methods  which  will  be  dis- 
cussed later  are  used. 

Some  time  ago  500  letters  were  sent  to  a  nearly  even 
number  of  manufacturers,  jobbers  and  retailers  for  the 
purpose  of  learning  the  practices  relative  to  discounting, 
credit  giving,  and  related  subjects  in  different  parts  of  the 
country.  Over  30  per  cent,  of  these  people  replied  and 
upon  their  communications  the  following  facts  are  based. 
The  relations  between  the  manufacturer  and  jobber 
are  simple.  Jobbers  who  handle  the  lines  of  any 
manufacturer  are  comparatively  few,  and  it  is  easy 
to  learn  their  standing.  When  the  manufacturer 
sells  to  the  retailer  his  interests  in  giving  credit   are 


62  MERCANTILE  CREDIT 

identical  with  those  of  the  jobber  whose  dealings  are 
with  the  retailer. 

Payment  within  ten  days  is  usually  considered  cash. 

Beyond  this,  payments  range  from  twenty  days'  time  to 

over  a  year.     One  and  two  months'  time  is 

,.  usually    given    on    groceries.     On    tea,    and 

coffee  in  bulk,  three  and  four  months  are  often 
allowed.  On  dry  goods  and  textiles  generally  the  average 
term  of  credit  is  longer.  The  longest  term  of  credit  is 
given  on  agricultural  machinery,  and  the  payments  are 
often  arranged  to  be  made  in  installments. 

The  comparative  terms  of  credit  on  the  different  lines 
of  goods  have  an  economic  basis.  No  reason  exists  for 
What  de-  lending  credit  beyond  the  time  when  the 
termines  buyer  sells  his  goods.  Mercantile  credit  is  given 
the  term       primarily  to  enable  the  buyer  to  pay  for  goods 

ere  1 .  fTom  foe  proceeds  of  their  sale.  As  groceries 
may  be  turned  in  one  or  two  months,  the  ordinary  term 
of  credit  on  them  is  from  thirty  to  sixty  days.  It  gen- 
erally requires  a  longer  period  for  the  sale  of  textiles  and 
a  longer  term  of  credit  is  consequently  given.  Farm  im- 
plements are  sold  by  retailers  to  buyers  who  usually  need 
several  months  in  which  to  pay  for  them,  and  these  pay- 
ments are  usually  arranged  to  come  at  times  when  crops 
are  sold.  In  the  case  of  some  other  commodities  the 
urgency  is  not  so  great  for  granting  credit  to  the  con- 
sumer, wherefore,  the  retailer  is  inclined  to  permit  his 
credit  relations  with  the  consumer  to  be  determined 
not  by  the  consumer  but  by  the  manufacturer  and 
jobber. 


MERCANTILE  CREDIT  63 

Various  methods  are  employed  by  manufacturers  and 

jobbers  to  learn  the  standing  of  the  retailer.     All  of 

them  use  the  information  furnished  by  the 

leading  commercial  agencies.     Aside  from  this    p°urces  of 

lnforma- 
their  methods  vary.     In  giving  credit  to  new    tion> 

customers  some  require  a  definite  statement 

from  them  of  their  financial  standing.     Others  learn  what 

they  can  from  their  traveling  salesmen.     Still  others  find 

out  what  they  can  from  the  local  bankers  and  from  other 

houses  with  whom  the  debtor  has  dealings.     Then,  too, 

manufacturers  and  jobbers  are  often  organized  in  credit 

men's  associations  which  are  more  or  less  clearing-houses 

of  information  with  reference  to  the  credit  standing  of 

their  customers.     So  in  a  variety  of  ways  the  financial 

ability  and  character  of  the  retailer  are  learned. 

The  rate  of  discount  for  cash  payments  varies  as 
widely  as  the  term  of  credit.     It  varies  from  6  per  cent, 
to  72  per  cent,  a  year,  while  the  average  an- 
nual rate  is  between  12  and  18  per  cent.     In     The  rate 
fixing  discounts  for  cash,  manufacturers  and      count. 
jobbers  may  wield  a  ready  weapon  to  force  cash 
payments.     As  a  rule  the  longer  the  term  of  credit,  the 
higher  is  the  rate  of  discount,  because  the  more  uncertain 
the  payment  of  the  obligation.     Discounts  on  groceries 
average  about  12  per  cent,  a  year,  on  textiles  about  18 
per  cent.,  while  on  certain  kinds  of  jewelry  the  rate  is  as 
high  as  72  per  cent,  a  year. 

High  rates  are  levied  to  cover  losses  by  failures. 
When  conditions  are  normal,  manufacturers  and  jobbers 
know  approximately  what  losses  they  wi,ll  sustain  through 


64  MERCANTILE  CREDIT 

failures,   and  therefore,  adjust  interest  charges  to  cover 

these  losses.     Those  who  do  not  fail  are  compelled  to  pay 

the  debts  of  those  who  fail.     If  we  consider 

Interest        rates  natural  in  which  the  excess  above  the 

rates  cover 

losses.  general  rates  prevailing  on  money  loans  pay 

the  losses  of  bankrupts,  it  often  happens  that 
the  natural  rate  deviates  from  the  customary  rates. 
There  is  frequently  a  tendency  to  cling  to  cash  discount 
rates  when  the  excess  of  these  rates  above  the  prevailing 
ones  more  than  pays  the  losses  through  bankruptcies. 
The  manufacturer  and  jobber  are  often  interested  on  this 
account  in  having  the  debtor  take  the  full  term  of  credit 
rather  than  pay  cash. 

Another  reason  for  the  divergence  between  the  so- 
called  customary  and  natural  rates  lies  in  the  character 

of  the  merchant's  business.     From  the  very 
Why  rates 
on  mer-       nature  of  his  business  he  has  usually  but  a 

cantile         limited  amount  of  property  upon  which  he  can 

loans  are      secure  advances  of  capital.     The  value  of  his 

goods,  relatively  speaking,  is  a  high  percentage 

of  the  value  of  the  plant.     So  the  scope  of  his  business 

as  a  merchant  is  limited  directly  by  the  extent  to  which 

he  goes  into  business  loans.     On  this  account  discount 

rates  may  be  excessively  high  to  compel  purchasers  to 

resort  to  the  regular  institutions  of  loan. 

It  seems  apparent  that  it  is  to  the  interest  of  the 

retailer  to  cash  all  his  bills  with  money  borrowed  from 

banks.     Many  do  this,  and  consequently  save  from  6  to 

12  per  cent,  a  year  on  purchases.     The  lack  of  capital 

of  many  retailers  and  the  difficulties  in  the  way  of 


MERCANTILE  CREDIT  65 

borrowing  at  banks,  exclude  them  from  this  opportunity. 
To  put  the  matter  in  another  way,  the  ease  with  which 
commercial  loans  can  be  secured  as  against  the  difficulty 
of  securing  bank  loans  is  responsible  for  the  high  rates 
of  the  former  and  the  low  rates  of  the  latter.  Banks 
loan  only  on  good  collateral,  on  personal  security,  and  to 
those  who  have  excellent  credit  standing.  The  retailer's 
purchases  are  comparatively  frequent,  so  that  the  diffi- 
culties in  the  way  of  obtaining  good  security  closes  this 
route  of  escape  from  high  interest  charges  on  capital 
borrowed.  There  are,  however,  other  merchants  whose 
credit  at  bank  is  good  and  who  habitually  allow  the 
term  of  credit  to  expire  before  payments  are  made.  In 
doing  so  considerable  is  lost  by  not  appreciating  the 
difference  between  the  bank  rates  of  interest  and  the  rates 
charged  by  lenders  of  merchandise. 

The  credit  instruments  most  commonly  used  in  mer- 
cantile credit  are  bills  of  exchange,  promissory  notes,  and 
book    accounts.     In    the    first    instance    the 

seller  of  goods  may  write  a  draft  ordering  the     . 

»  •>  _  struments. 

buyer  to  pay  the  amount  of  the  bill  a  given 
number  of  days  after  sight.  If  the  latter  accepts  it, 
the  seller  of  the  merchandise  after  endorsing  the  bill 
may  sell  it  at  once  to  his  banker  as  double-name  paper, 
or  to  some  one  else  in  the  settling  of  his  bills.  The 
promissory  note  may  be  used  in  practically  the  same 
way  except  that  the  purchaser  of  the  goods  signs  a 
promissory  nolo  to  pay  the  amount  of  the  bill  in  a  given 
time.  In  this  case  as  in  the  former  one,  after  the  seller 
of  the  goods  endorses  the  note  it  may  be  sold  to  his 


66  MERCANTILE  CREDIT 

banker  or  to  some  one  else,  usually  one  tc  whom  he 
owes  an  account,  as  double-name  paper.  The  use  of 
such  credit  instruments  as  bills  of  exchange  and  promis- 
sory notes  makes  it  possible  for  the  seller  of  goods  to 
secure  funds  at  once  upon  credit  instruments  which  are 
an  evidence  of  a  loan  of  thirty,  sixty,  or  ninety  days. 
Moreover  they  are  often  used  as  mediums  of  exchange 
cancelling  many  obligations  and  thus  dispensing  with 
the  need  for  money. 

Notes  or  bills  based  upon  mercantile  loans  have  always 
been  considered  good  bankable  paper,  and  in  many  com- 
munities the  bulk  of  bank  loans  are  based 

.     ,  upon  these  credit  instruments.     As  mercan- 

brokers.  ^ 

tile  loans  are  always  connected  with  a  sale  of 
goods  it  is  not  possible  for  merchants  to  maintain  as  high 
standards  of  credit  while  selling  goods  as  may  be  main- 
tained by  banking  institutions  whose  business  is  de- 
voted almost  exclusively  to  the  making  of  loans.  The 
diverse  conditions  under  which  mercantile  credit  was 
given  and  the  lack  of  system  on  the  part  of  merchants  in 
giving  credit,  made  it  impossible  for  banks  to  handle 
all  classes  of  commercial  paper  offered  to  them  for  sale. 
Consequently  there  has  developed  a  specialized  class 
known  as  note  brokers  to  facilitate  the  sale  of  commer- 
cial paper.  The  note  brokers  made  a  study  of  the  value 
of  commercial  paper  a  specialty,  and  consequently  be- 
came experts  in  this  department  of  credit.  Acting  as 
middle  men,  they  purchased  commercial  paper  from 
business  houses  and  sold  it  to  banking  institutions. 
Where  banks  were  unwilling  to  accept  single-name  paper, 


MERCANTILE  CREDIT  67 

note  brokers  often  either  act  as  endorsers  or  else  secure 
endorsers  for  these  notes.  It  frequently  happens  at 
present  that  no  bank  will  make  a  single  loan  in  such 
amounts  as  large  mercantile  houses  desire  in  order  to 
make  a  cash  purchase.  In  such  instances  the  mercantile 
house  will  call  on  a  note  broker  who  executes  several 
notes  and  sells  them  to  a  number  of  financial  concerns. 
While  the  note  broker  came  into  existence  when  mercan- 
tile credit  was  given  for  from  six  to  twelve  months  he  has 
come  to  be  an  important  factor  in  mercantile  life  with 
the  changed  organization  of  business. 

The  third  form  of  mercantile  credit  is  the  book  ac- 
count which  is  frequently  used  in  the  case  of  sales  be- 
tween merchants.  When  a  debt  is  due  the 
account  is  usually  settled  by  a  check  upon  the 
purchaser's  bank.  Book  accounts  are  taking 
the  place  of  promissory  notes  and  commercial  drafts  but 
they  are  not  as  serviceable  to  sellers  of  merchandise  in 
enabling  them  to  realize  at  once  upon  accounts  where 
time  is  given  for  the  payment  of  bills.  The  promissory 
note  and  the  bill  of  exchange  can  be  sold  at  once.  The 
seller  of  goods  may  sell  his  book  account  or  borrow  upon 
it,  but  it  is  more  difficult  to  sell  it  or  borrow  upon  it 
than  it  is  to  sell  either  the  bill  of  exchange  or  a  promis- 
sory note.  When  either  of  the  latter  is  sold  its  genuine- 
ness is  attested  by  the  signature  of  the  maker  of  the 
paper  and  when  both  the  note  and  bill  are  endorsed,  as 
is  usually  the  case,  two  parties  are  pledged  to  the  pay- 
ment of  the  instrument.  Upon  the  other  hand  the  pur- 
chaser or  assignee  of  the  book  account  must  depend  for 


68  MERCANTILE  CREDIT 

its  validity  on  the  representation  of  the  man  who  sells  it 
or  who  borrows  upon  it,  and  on  this  account  the  latter 
must  be  well  known  to  the  former. 

A  regular  system  has  developed  of  lending  on  book 
accounts,  and  in  some  instances  commercial  banks  main- 
tain separate  departments  to  pass  judgment  upon  the 
value  of  this  class  of  accounts,  while  in  other  instances 
brokerage  houses,  or  commission  houses,  have  developed 
to  negotiate  loans  upon  book  accounts.  Prendergast 
claims  that  "it  is  probable  that  this  method  found  its 
inception  in  a  practice,  introduced  some  years  ago,  where- 
by a  house  having  no  other  form  of  collateral  to  offer  its 
bank,  and  being  much  in  need  of  money,  induced  its 
bank  to  accept  an  assignment  of  certain  accounts.  Ad- 
vances were  made  by  the  bank  to  an  agreed  percentage 
of  the  gross  amount  of  the  accounts  assigned."1 

There  are  three  methods  by  which  the  man  who  sells 
merchandise  on  time  may  realize  at  once  on  his  book 
Methods  accounts:  1.  He  may  sell  his  book  account 
of  lending  outright,  in  which  case  the  purchaser  assumes 
on  book  aii  risks  and  charges  high  interest  rates  and 
also  a  bonus  proportioned  to  the  degree  of  the 
risk.  2.  The  seller  of  merchandise  may  assign  his  book 
account  and  borrow  upon  it  up  to  a  certain  per  cent,  of 
the  value  of  the  account.  The  assignor  in  this  case  per- 
mits the  borrower  to  collect  from  the  funds  assigned,  and, 
in  place  of  these,  others  may  be  assigned  to  the  bank  to 
keep  up  the  ratio  agreed  upon.  Of  course  in  this  case, 
if  the  assignor  should  fail  or  if  for  any  reason  the  credit 

1  Credit  and  Its  Uses,  p.  115. 


MERCANTILE  CREDIT  69 

relations  between  the  borrower  and  lender  should  be 
broken,  the  assignee  would  proceed  at  once  to  collect 
the  assigned  accounts.  3.  In  another  case  the  assignee 
may  advance  funds  to  a  certain  percentage  of  the  value 
of  the  account  and  charge  a  heavy  interest  rate  and  a 
bonus  for  the  service  rendered.  The  funds  obtained 
by  the  borrower  in  this  instance  are  secured  under  more 
unfavorable  conditions  than  in  the  former  one.  In  most 
of  the  latter  cases  a  higher  interest  rate  is  exacted  than  in 
the  former  case,  and,  as  the  lending  institution  collects  the 
accounts,  the  selling  house  suffers  somewhat  in  its  repu- 
tation, as  its  customers  are  made  aware  of  the  fact  that 
its  accounts  are  assigned  and  that  it  does  not  enjoy  a 
high  grade  of  credit;  whereas  in  the  method  described  in 
(2),  the  borrower  collects  his  own  accounts  and  his 
customers  have  no  knowledge  of  the  assignment  of 
accounts. 

In  still  another  case  where  book  accounts  are  as- 
signed, the  assignee  may  proceed  at  once  to  collect  the 
accounts. 

Commission  houses  have  developed  in  recent  years  to 

deal  exclusively  in  book  accounts;  and,  as  they  advance 

funds  and  discount  accounts,  they  are  in  this 

respect    bankers.     Their    numbers    in    large     sion 

commercial  centers  attest  the  profitableness     houses 

of  the  business  in  which  they  are  engaged.      deal  in 

Many  of  them  have  back  of  them  wealthy 

J       accounts. 

banks  and  trust  companies  which  find  in  the 
advancement  of  funds  to  these  institutions,  a  lucrative 
field  of  investment. 


70  MERCANTILE  CREDIT 

The  rates  charged  are  a  further  evidence  of  the  differ- 
ence in  rates  between  regular  banking  loans  and  mercan- 
tile loans. 

An  important  change  has  been  introduced  in  the  sys- 
tem of  credit  giving  by  the  practice  of  dating  ahead. 
An   impression   prevails   that   dating   ahead 

*  m?  and  credit  giving  are  the  same.  On  the  con- 
trary, they  are  distinct,  although  directly 
related.  When  we  depended  upon  foreign  countries  for 
the  bulk  of  our  manufactured  goods,  it  was  necessary 
for  the  importer  and  jobber  to  carry  all  lines  in  stock 
which  were  sold  to  the  retailer.  When  the  American 
manufacturers  began  to  supply  the  consumers  it  was 
learned  that  there  would  be  a  clear  advantage  in  selling 
all  commodities,  not  staples,  before  they  were  produced. 
Such  commodities  as  sugar,  flour,  and  the  cruder  kind  of 
textiles  can  be  kept  in  stock,  as  the  demand  for  them  is 
comparatively  regular.  But  changes  in  fashion  and  differ- 
ence in  kind  of  commodity  with  the  consequent  uncer- 
tainty of  demand,  makes  the  production  in  advance  of 
all  products*  not  of  the  staple  type  a  hazardous  enter- 
prise, and  producers  are  unwilling  to  take  the  risk. 

The  method  of  procedure  in  dating  ahead  is  as  follows: 

The  manufacturer  or  wholesaler  goes  to  the  retailer  in 

the  fall  and  takes  orders  for  spring  and  summer 

e    od  of    g00Cis#     After  the  orders  are  taken  the  goods 

ahead.  are  produced.     The  goods  are  dated,  we  will 

say,  February  1,  but  the  manufacturer  ships 

the  goods  to  the  retailer  as  soon  as  they  are  manufactured. 

If  the  goods  are  paid  for  within  ten  days  of  the  first  of 


MERCANTILE  CREDIT  71 

February,  then  payment  is  usually  considered  cash,  and 
all  payments  are  dated  from  February  1.  But  the  re- 
tailer may  have  the  goods  in  his  possession  before  the  first 
of  the  month  and  some  of  them  often  as  long  as  six  weeks 
or  two  months  prior  to  the  time  the  goods  are  dated. 
In  a  sense,  dating  ahead  prolongs  the  term  of  credit  by 
the  interval  between  the  shipment  and  dating  of  the 
goods.  The  keeping  of  goods  in  stock  compels  retailers 
to  increase  their  insurance  account.  In  all  cases  where 
goods  are  sold  before  the  time  of  dating,  an  advantage 
is  gained.  However,  in  such  cases  competition  between 
dealers  often  results  in  extending  credit  to  consumers. 
So  the  system  of  dating  ahead  is  not  only  an  extension  of 
credit  itself  but  it  indirectly  results  in  the  prolongation 
of  the  term  of  credit. 

Mr.  Prendergast,  in  Credit  and  Its  Uses,  gives  a 
somewhat  different  interpretation  of  dating.  The  dis- 
continuance of  'long  time'  such  as  four,  six,  and  eight 
months,  has  had  the  effect  of  introducing  the  feature  of 
'dating'  into  commercial  transactions  and  credit.  A 
'dating'  of  thirty  days  or  sixty  days  indicates  that  the 
term  of  credit,  whatever  it  may  be,  does  not  begin  to  date 
until  the  expiration  of  the  term  of  dating.  For  instance, 
a  bill  sold  and  charged  on  January  1,  1906,  with  a  dating 
of  sixty  days — terms,  2  per  cent,  ten  days  and  net  thirty 
days — is  not  due  until  April  1,  as  the  dating  does  not 
expire  until  March  1,  and  the  terms  being  thirty  days 
carry  it  to  April  1.  The  purchaser  has  the  option  of  pay- 
ing it  whenever  he  chooses,  but  payment  cannot  be  in- 
sisted upon  until  April  1.     A  merchant  purchasing  a  bill 


72  MERCANTILE  CREDIT 

under  the  foregoing  terms  would,  if  he  were  in  a  position  to 
do  so,  pay  the  bill  at  the  end  of  ten  days  (January  10), 
deduct  his  2  per  cent,  discount,  and  also  deduct  interest 
at  the  rate  of  6  per  cent,  per  annum  for  the  unexpired 
term  of  sixty  days  (the  dating),  of  which  time  he  has  not 
availed  himself." 

This  author  then  assigns  other  reasons  for  dating. 
Whether  "dating"  grew  out  of  an  endeavor  to  shorten 
the  term  of  credit,  as  it  undoubtedly  did,  in  many  cases, 
or  has  other  reasons  for  its  existence  its  effect  is  always  the 
same,  it  really  extends  the  term  of  credit. 

Aside  from  prolonging  the  term  of  credit,  dating  ahead 

increases   credit   giving.     When   the   goods    are    dated 

_    .  ahead  they  cannot  be  sold  C.  O.  D.     Under 

Dating  J   .     .  ,  ,     . 

ahead  in-    *ms  sys*em  it  is  not  always  within  the  power 

creases  of  the  seller  to  dictate  the  terms  of  payment, 
credit  When  the  goods  are  not  shipped  C.  O.  D.,  if 

the  buyer  should  refuse  to  pay  within  ten  days, 
the  term  of  grace  usually  allowed  for  cash  payments,  the 
only  recourse  of  the  creditor  is  either  to  refuse  to  have 
further  dealings  with  the  buyer  or  to  institute  proceedings 
to  collect  the  account.  Injury  to  the  buyer's  standing  by 
recourse  to  either  of  these  methods  may  often  be  ade- 
quate to  force  him  to  abide  strictly  by  his  contract. 
The  point  of  interest  in  this  connection  is  that  the 
system  itself  practically  provides  for  credit  giving. 

The  system  has  also  another  bearing  on  credit.  The 
manufacturer  is  relieved  of  the  necessity  of  taking 
chances  on  production.  As  goods  are  shipped  as  soon  as 
produced,  he  is  also  relieved  of  the  necessity  of  carrying 


MERCANTILE  CREDIT  73 

insurance  on  the  stock.     However,  these  advantages  may 
be  counteracted  to  a  certain  extent  by  interest  accounts 
on  long  period  datings.     As  soon  as  dating      Advan- 
ahead  came  to  be  generally  practised,  competi-      tages  of 
tion  extended  the  period  of  the  dating.     This      datinS 
meant  for  the  producer  a  prolongation  of  the      t0  manu_ 
interval  between  production  and  sale,  if  we      facturers 
consider  the  sale  for   practical  purposes  to      and 
take  place  when  the  goods  are  dated.     The      J0 
traveling  salesman  is  out  taking  orders,  and  the  goods 
are  produced  long  before  they  are  paid  for.     It  matters 
not  for  our  purpose  whether  we  consider  this  an  increase 
of  interest  account  of  capital  expended,  or  an  extension 
of  credit.     The  result  is  the  same.     In  dating  ahead  the 
producer  has  the  advantage  of  regularity,  certainty  and 
avoidance  of  risk  in  an  extension  of  credit. 

In  dating  ahead  the  risk  is  transferred  from  the  manu- 
facturer and  wholesaler  to  the  retailer.  In  the  effect 
of  the  system  on  the  mind  of  the  retailer  we  influence 
find  another  influence  tending  to  increase  both  of  dating 
credit  transactions  and  the  number  of  failures,      ahead  on 

rptflilpr 

The  longer  you  postpone  the  time  of  payment 
the  more  reckless  and  indifferent  people  are  in  giving 
orders.  Purchasing  unnecessary  and  unsalable  goods 
results  in  an  enforced  extension  of  the  term  of  credit. 
Failures  to  a  very  large  extent  result  from  having  in 
stock  unsalable  goods. 

Since  the  ending  of  the  crisis  in  the  United  States 
fifteen  years  ago  there  has  been  some  agitation  favoring 
a  shortening  of  the  term  of  credit  and  the  abandonment 


74  MERCANTILE  CREDIT 

of  commercial  credit  wherever  possible.  The  organiza- 
tion of  the  business  community  practically  forbids  mak- 
ing much  headway  in  the  latter  movement.  However, 
much  advancement  has  been  made  in  the  last  ten  years 
in  systematizing  the  methods  of  giving  credit  and  in 
minimizing  losses  resulting  from  credit  giving. 


CHAPTER  V 
PERSONAL  CREDIT 

Personal  or  individual  credit  is  the  power  of  an 
individual  to  secure  something  of  value  in  the  present 
for  a  promise  to  pay  in  the  future.  It  in-  Definition 
eludes  credit  used  to  secure  production  as  well  of 
as  consumption  goods,  and  the  credit  of  personal 
partnerships  as  well  as  of  individuals.  Its 
most  common  kind  to-day  is  the  credit  secured  at  the 
retail  store;  that  is,  the  power  to  secure  goods  in  exchange 
for  a  promise  to  pay  in  the  future.  It  is  also  used  to 
secure  medical,  legal  and  other  expert  service,  and 
to  borrow  money  which  may  be  used  for  a  variety  of 
purposes,  chiefly  of  an  individual  or  personal  character. 
Because  the  things  procured  by  personal  credit  are  used 
largely  for  individual  ends,  or  for  purposes  of  consump- 
tion, it  is  sometimes  known  as  consumptive  credit.  In 
this  discussion  personal  credit  is  given  a  broader  meaning. 

It  is  sometimes  difficult  to  state  at  what  point  mercan- 
tile credit  ends  and  personal  credit  begins. 
The  purchasing  of  goods  on  time  for  purposes     and  mer_ 
of  final  consumption,  from  the  point  of  view     cantile 
of    the  buyer  is  clearly  a  case  of  individual     credit 
credit.     Should  the  sale  of  goods  on  time  by  " 

the  retailer  be  placed  in  a  different  category 
than  the  sale  of  goods  on  time  by  either  the  manufacturer 

75 


76  MERCANTILE  CREDIT 

or  the  wholesaler?  When  the  manufacturer  sells  to  the 
wholesaler  on  time,  the  latter  often  desires  time  in  order 
that  he  may  pay  for  the  goods  from  the  proceeds  of  their 
sale.  Credit  is  granted  by  the  manufacturer  and  re- 
quested by  the  wholesaler  to  facilitate  the  sale  of  goods. 
In  this  sense  the  function  rendered  by  credit  is  quasi- 
public  if  we  assume  that  a  social  service  is  furnished  in 
the  distribution  of  industrial  products.  A  similar  con- 
dition prevails  when  credit  is  given  the  retailer,  as  in 
theory  he  is  granted  time  to  enable  him  to  pay  for 
goods  from  the  proceeds  of  their  sale. 

The  retailer  does  not  give  credit  to  enable  the  pur- 
chaser to  pay  for  them  from  the  proceeds  of  their  sale, 
because  in  the  case  of  consumption  goods  they  are  bought 
not  for  sale  but  for  consumption  purposes.  The  sale  of 
goods  on  time  by  the  retailer  is  not  considered  mercan- 
tile credit,  as  time  for  payment  is  not  given  to  facilitate 
their  future  sale.  In  the  case  of  production  goods  sold 
by  the  retailer,  a  variety  of  reasons  determine  the  giving 
of  credit  and  the  terms  of  credit.  In  some  instances 
credit  is  granted  in  order  that  the  goods  may  in  part  pay 
for  themselves.  In  the  case  of  producer's  goods  sold  for 
farming  purposes,  the  time  of  payment  usually  coincides 
with  the  period  of  marketing  farm  products.  In  general, 
credit  is  given  by  the  retailer  because  the  buyer  is  unable 
to  pay  cash,  whether  the  goods  he  buys  are  for  production 
or  consumption  purposes. 

The  success  of  all  the  distributors  from  the  manu- 
facturer to  the  retailer  depends  upon  the  payments  by  the 
final  purchasers  to  the  retailers.     Although  the  goods 


PERSONAL  CREDIT  77 

purchased  from  the  retailers  on  time  are  usually  put  to  a 
different  use  by  their  buyers  than  the  goods  purchased 
by  the  preceding  groups  in  the  chain  of  dis- 
tribution, the  sale  in  each  case  is  a  loan  of    ™eTCAn~ 

tile 
goods,  and  the  final  payments  to  the  retailers    credit  de- 
serve to  cancel  the  preceding  obligations  in-    pendent 
curred  upon  the  same  goods  by  the  preceding    on 
groups  of  distributors.     I  do  not  mean  to  say    cre(jit 
that  the  manufacturer  and  jobber  must  wait 
until  goods  are  paid  for  by  consumers,  but  that  the  whole 
superstructure  of  mercantile  credit  breaks  down  if  the 
final    purchaser    is    unable    to    meet    his    obligations. 
Mercantile    credit    and    personal   credit  are   so  closely 
related   that   a   complete   consideration   of  the    former 
warrants  a  treatment  of  the  latter. 

Personal  credit  is  given  to  a  large  multitude  of  people 
under  a  great  variety  of  conditions,  and  the  laws 
governing  the  dispensers  of  personal  credit  are  likewise 
various.  The  system  of  selling  on  time  by  retailers,  the 
methods  of  investigating  the  standing  of  those  seeking 
credit,  and  the  influence  of  the  extension  of  credit  upon 
methods  of  selling  and  upon  the  prices  of  goods,  will  be 
considered. 

When  personal  credit  is  used  to  secure  money,  the 

lender  may  be  an  individual,  a  partnership,      Banking 

a    corporation,    or    a    banking    institution.      and 

When    the    lender   is    a    bank,    a    confusion  t.. 

credit 

may  arise  between  banking  credit  and  per-      con. 
sonal  credit.     It  is  in  possessing  credit,  or  in      trasted. 
manufacturing  credit,  that  a  bank's  chief  function  as  a 


78  MERCANTILE  CREDIT 

credit  institution  consists.  However,  its  capacity  to 
create  credit  depends  chiefly  on  its  skill  in  granting 
credit;  while  individuals,  partnerships,  and  corporations, 
are  the  grantees  of  credit  by  banking  institutions.  The 
borrowing  of  funds  by  an  individual  from  a  bank  is  a 
personal  credit  and  not  a  banking  credit  transaction. 

Personal  or  individual  credit  was  the  oldest  form  of 
credit.  As  has  been  pointed  out,  people  in  prehistoric 
Personal  times  enjoyed  credit  although  they  did  not 
credit  of  possess  what  might  be  called  a  credit  system. 
earl7  In  the  hunting  stage  of  society  those  success- 

ful in  the  chase  loaned  to  their  unfortunate 
neighbors.  At  this  time  charitable  impulses  inspired 
lending.  The  borrower  returned  either  in  kind  or  in 
money  the  amount  of  the  loan  without  paying  interest. 
The  public  sentiment  of  the  primitive  community  required 
that  the  wealthy  should  help  temporarily  those  who  had 
suffered  misfortune  and  that  no  interest  charges  should 
be  made  for  the  advancement  of  funds.  This  public 
sentiment  had  at  first  the  binding  force  of  law.  Later 
when  interest  charges  were  made  by  the  few  who  took 
advantage  of  the  poverty  of  those  who  sought  credit, 
nearly  all  the  early  nations  passed  laws  forbidding  usury 
and  imposed  severe  penalties  for  usurious  charges.  The 
literature  of  the  times  teems  with  discussions  on  the 
iniquity  of  the  lender  whose  wealth  grows  at  the  expense 
of  his  less  fortunate  neighbor. 

So  long  as  loans  were  made  chiefly  to  borrowers  who 
were  in  desperate  circumstances  who  were  compelled  to 
meet  obligations  at  an  appointed  time  and  were  unable 


PERSONAL  CREDIT  79 

to  do  so  without  borrowing,  the  sentiment  and  the  laws 

against  usury  prevailed.     When  industrial  development 

had  assumed  a  new  form,  when  people  bor- 

rowed  money  to  invest  in  industrial  under-    cjjanges 

takings,  the  former  views  with  reference  to    brought 

usury  passed  away.     When  the  borrower  ob-    about 

tained  funds  to  invest  in  profitable  undertak-      , 

1  charges. 

ings  it  became  obvious  that  those  who  had 
saved  and  hoarded  their  funds  were  entitled  to  a  share 
in  the  profits  of  the  business  in  which  their  money  in  the 
hands  of  the  borrower  was  invested.  This  new  develop- 
ment gave  rise  to  our  present  views  of  loans  and  of  inter- 
est. Personal  or  individual  credit  has  thus  preceded  all 
the  other  forms  of  credit  and  gradually  merged  into 
mercantile,  capital  and  banking  credit. 

To-day  it  represents  the  most  varied  and  unsystematic 
kind  of  credit.     The  people  who  receive  personal  credit 
represent   all  stages   and   conditions   of  life. 
As  nearly  all  people  receive  credit  at  one  time      tliat 
or  another,  a  classification  of  those  who  re-      receive 

ceive  personal  credit  would  include  practically      personal 

credit* 
the  whole  of  the  human  race.  The  wage- 
earner  is  granted  credit  from  his  grocery  store  until 
Saturday  night  when  he  receives  his  pay.  Those  who 
work  for  salaries  which  are  paid  monthly  often  receive 
credit  either  from  necessity  or  convenience,  and  if  the 
time  of  payment  coincides  with  the  period  when  income 
is  received,  the  term  of  credit  in  this  case  should  be  longer 
then  when  income  is  received  weekly.  Professional 
people  and  men  of  means  are  granted  credit  because  it 


80  MERCANTILE  CREDIT 

is  more  convenient  to  pay  in  large  amounts  than  to  carry- 
funds  and  pay  on  each  occasion  of  purchase.  Each  of 
these  classes  lends  itself  to  a  great  variety  of  sub-divisions, 
consequently  the  number  of  classes  seeking  personal  credit 
place  insurmountable  obstacles  in  the  way  of  classifying 
them. 

Personal  credit  is  likewise  granted  by  a  great  variety 
of  institutions  and  classes  of  people.  The  retail  institu- 
Wh  tion  giving  the  greatest  amount  of  credit  is 

grants  the  grocery  store.     Purchases  at  the  grocery 

personal  store  are  made  very  frequently,  sometimes 
several  times  a  day  in  cities  and  towns,  and 
it  is  consequently  inconvenient  to  pay  cash  on  each 
occasion  of  purchase.  The  grocery  store  is  a  community 
institution  and  it  is  assumed  that  the  management  has 
a  better  knowledge  of  buyers  than  in  stores  where  pur- 
chases are  not  made  so  frequently  and  where  the  retail 
institution  is  not  to  such  an  extent  a  community  institu- 
tion. Credit  is  obtained  at  dry  goods  stores,  drug  stores, 
hardware  stores,  etc.,  but  not  so  often  as  in  the  grocery 
store  for  the  above-named  reasons.  As  groceries  are 
life  necessities  we  find  another  reason  why  it  is  difficult 
to  refuse  credit  to  those  who  have  been  by  misfortune 
suddenly  rendered  unable  to  pay  their  debts.  The  uses 
of  things  which  are  purchased  of  retailers  have  much  to 
do  with  the  granting  of  personal  credit  and  the  terms  of 
personal  credit.  The  use  of  dry  goods,  drugs,  hardware, 
books,  etc.,  are  not  often  absolutely  essential  to  life  and 
consequently  the  need  to  give  credit  on  these  things  is 
not  so  imperative  as  on  groceries.     Hardware  and  imple- 


PERSONAL  CREDIT  81 

ment  products  are  chiefly  producers'  goods  and  the  use 
to  which  these  things  are  put  determines  largely  the  con- 
ditions of  credit.  Personal  credit  is  often  given  for  the 
professional  services  of  lawyers,  physicians,  etc.  In  the 
very  nature  of  things  some  credit  must  be  given  for  these 
services  as  the  service  is  rendered  on  the  installment 
plan  and  payment  cannot  be  expected  until  the  service 
is  completed.  Personal  credit  is  often  given  in  the  form 
of  a  loan  of  funds  in  which  the  purposes  to  which  the 
funds  are  to  be  devoted  may  or  may  not  be  stated  as  a 
condition  of  making  the  loan.  As  no  rules  of  classifica- 
tion can  be  very  easily  applied  to  either  the  receiver  of 
personal  credit,  the  giver  of  personal  credit,  or  to  the 
purposes  to  which  the  borrowed  funds  are  devoted,  it  is 
difficult  to  lay  down  any  definite  rules  which  govern  the 
granters  of  personal  credit. 

The   conditions   under   which   goods   are   sold  make 
cash  payments  in  many  instances  inconvenient  if  not 
impossible.     First,    let    us     take    the    case 
of  the  retail  grocery  store,   the    institution    necessary 
which  gives  the  greatest  amount  of  personal    for 
credit.     As  a  rule,  groceries  are  delivered  to    grocers 

customers.     Competition  between  stores  has     °  ^e 
m  r  credit. 

led  the  great  majority  of  them  in  our  cities  to 
send  delivery  boys  to  homes  to  take  orders  or  to  use  the 
phone  to  secure  orders  for  daily  deliveries.  The  house- 
wife, too,  uses  the  phone  to  order  goods.  This  is  done 
frequently  several  times  a  day.  In  all  these  cases  it 
is  impossible  for  the  retailer  to  receive  cash  payments 
on  the  delivery  of  his  goods,  and  the  cases  are  exceptional 


82  MERCANTILE  CREDIT 

where  he  does  receive  cash.  In  a  great  minority  of  in- 
stances are  goods  purchased  by  those  who  visit  the  grocery 
stores.  Even  in  these  instances  groceries  are  purchased 
so  frequently  that  it  is  inconvenient  to  carry  funds  to 
make  cash  payments.  Those  who  visit  grocery  stores 
to  make  purchases  in  most  instances  give  orders  also  by 
phone  or  to  the  delivery  boy  who  visits  the  home  of  the 
customer.  The  circumstances  surrounding  purchases  in 
the  regular  grocery  store  make  cash  payments  almost  an 
impossibility.  When  cash  payment  is  not  made  for 
goods,  the  salesman  furnishes  to  the  purchaser  of  grocer- 
ies a  bill  or  account  itemizing  the  things  purchased  with 
the  price  of  each.  In  some  instances  those  who  have 
a  credit  account  at  a  store  carry  an  account  book  in  which 
the  salesman  makes  a  list  of  the  things  purchased  with  the 
price  of  each  on  the  occasion  of  each  purchase. 

As  an  exception  to  the  rule  that  grocery  stores  give 
credit,  a  number  of  stores,  especially  chain  stores,  do  a 

strictly  cash  business.  However,  to  sell  only 
Some 

grocery  ^or  casn  manY  of  them  do  not  deliver  goods 
stores  do  thus  requiring  the  purchaser  to  come  to  the 
not  give        store  to  take  his  purchases  home  with  him. 

To  conduct  a  cash  business  and  to  decline  to 
furnish  a  delivery  service  requires  such  stores  to  sell  their 
goods  much  cheaper  than  goods  are  sold  at  the  regular 
grocery  stores. 

In  other  retail  institutions  as  dry  goods,  hardware, 
shoe,  drug,  clothing,  gents'  furnishing,  and  department 
stores,  the  giving  of  credit  is  not  so  common.  However, 
in  practically  all  of  these  stores  except  the  hardware 


PERSONAL  CREDIT  83 

and  gents'  furnishing  stores,  the  great  bulk  of  goods  is 

purchased  by  women  or  other  members  of  the  family 

than    the    breadwinner    who    ordinarily    has    _ 

Personal 
charge  of  the  finances  of  the  household.     It  is    cre<iit 

much  more  convenient  for  those  who   pur-    given  by 

chase  to  buy  on  credit  than  to  pay  for  goods.    otner 

stores* 
Moreover,   the  custom  of  paying  by  check 

rather  than  by  cash  is  greatly  on  the  increase.     Those 

who  can  get  credit  allow  their  bills  to  run  till  the  close  of 

the  month,  and  it  has  become  the  accepted  practice  of  the 

great  majority  of  retail  institutions  to  render  an  account 

at  the  close  of  each  month  to  their  customers  who  have 

been  given  credit.     They  then  receive  checks  from  their 

customers  shortly  afterward  which  are  returned  to  them 

receipted.     This   has   become  almost   the  regular  way 

of  making  payments  for  public  utility  service  such  as 

for  heating  and  lighting  and  for  other  kinds  of  service 

such  as  laundry,  cleaning,  etc. 

Where  the  custom  exists  of  rendering  an  account  at 

the  close  of  each  month  a  ready  weapon  is  at  hand  for 

the   creditor   to   enforce   prompt   collections. 

The  debtor  is  presumed  to  pay  his  bills  at  the  . 

responsi- 
close  of  each  month  when  the  accounts  are    bje  for 

rendered.     If  he  refuses  to  do  so  the  retailer    habits  of 

can  either  insist  on  prompt  payment  or  with-    Pavment 

hold   credit   from   him   in   the   future.     The    cbaser 

postponement  of  the  payment  of  accounts, 

and  the  running  up  of  bills  beyond  the  capacity  of  the 

debtor  to  pay,  may  often  be  traced  to  the  carelessness  and 

the  indifference  of  the  retailer  who  gives  credit. 


84  MERCANTILE  CREDIT 

The  position  of  the  retailer  is  wholly  different  from 

that  of  the  manufacturer  and  jobber  in  giving  credit. 

The  manufacturer  and  the  jobber  must  rely 

ac  or   e-    Qn  mercanti]e  agencies  and  other  sources  of  in- 
termirung 
tke  formation  to  learn  the  standing  of  their  cus- 

granting       tomers,  while  the  investigations  of  the  retailer 

of  credit       are  more  direct.     The  methods  of  the  retailer 

by 

retailers       depend  upon  his  location,  and  the  character 

of  his  trade.  The  retailer  often  knows  person- 
ally all  his  customers,  of  their  ability  to  pay,  of  their 
promptness  and  of  their  credit  worth.  In  large  cities  where 
dealers  have  a  great  variety  of  customers,  and  in  small 
places  where  there  is  a  transient  trade,  their  credit  prob- 
lems are  more  difficult.  The  usual  method  of  procedure 
when  an  applicant  for  credit  appears  is  to  ask  for  refer- 
ences to  other  dealers  with  whom  the  customer  had 
credit  relations.  Others  investigate  if  the  customer  has 
property.  Some  give  credit  on  the  evidence  of  honesty 
judged  from  a  few  moments'  conversation.  Still  others 
will  grant  credit  after  learning  where  the  man  works  and  of 
his  ways  of  spending  his  money.  In  some  cities  retailers 
are  organized  in  local  credit  men's  associations,  and 
through  these  organizations  they  avoid  making  loans  to 
irresponsible  persons.  The  range  of  losses  varies  with  the 
class  of  creditors,  the  kind  of  business,  and  the  section  of 
country.  Some  say  that  only  1/2  per  cent,  of  their  total 
sales  are  uncollectable,  while  others  place  this  percent- 
age of  loss  as  high  as  5  per  cent.  It  will  be  seen  that  the 
information  which  determines  the  granting  of  credit  by 
retailers  is  derived  from  a  great  variety  of  sources. 


PERSONAL  CREDIT  85 

The  following  are  some  of  the  reasons  why  credit  is 
given  unwisely  by  retailers: 

1.  Many  retailers  are  anxious  to  do  a  large  business 
and  to  give  external  evidences  of  doing  a  very  prosperous 
business.  To  attract  many  customers  it  is  necessary 
to  give  them  credit  on  easy  terms  and  to  deal  leniently 
with  them  in  making  collections.  Such  retailers  com- 
pete with  each  other  to  carry  on  an  extensive  trade, 
establish  easy  standards  of  credit,  and  demoralize  the 
personal  credit  market. 

2.  Other  retailers  do  not  keep  adequate  books,  do 
not  know  the  costs  of  conducting  their  business,  and  do 
not  know  their  credit  losses.  Bradstreet's  estimates 
of  the  causes  of  business  failures  show  that  approxi- 
mately one-fourth  of  them  are  due  to  incompetence,  and 
failure  to  keep  books  is  mentioned  as  the  first  evidence 
of  incompetence.  It  is  safe  to  say  that  if  retailers  knew 
the  costs  of  giving  credit  they  would  be  more  conserva- 
tive in  this  department  of  their  business  activities. 

3.  Fear  of  driving  away  customers  deters  many  re- 
tailers from  making  adequate  inquiries  regarding  the 
credit  standing  of  those  who  wish  to  buy  on  time.  As 
there  is  no  recognized  system  or  method  of  inquiry, 
retailers  are  timid  about  making  necessary  investigations 
of  the  credit  worth  of  their  customers,  and  the  latter  are 
inclined  to  resent  such  investigations.  If  there  were  a 
customary  method  of  procedure  by  retailers,  seekers  for 
credit  would  accept  as  a  matter  of  course  all  legitimate 
inquiries  concerning  their  ability  and  willingness  to  pay 
their  debts. 


86  MERCANTILE  CREDIT 

4.  As  personal  credit  has  been  given  in  a  haphazard 
way  no  definite  knowledge  exists  with  reference  to 
the  right  basis  for  personal  credit.  The  conditions  of 
wealth,  of  character,  of  ability  to  pay,  of  family  status, 
etc.,  which  should  determine  whether  credit  is  to  be 
given  at  all  or  how  much  should  be  given,  are  factors 
which  have  never  been  adequately  investigated.  Again 
the  poverty  of  the  consumer  or  in  other  words  his  in- 
ability to  pay,  is  often  a  reason  for  giving  credit  by  some 
retailers.  It  is  difficult  for  a  grocer,  for  instance,  to  re- 
fuse credit  to  a  wage-earner  who  has  always  paid  his 
debts  promptly,  but  who,  through  the  loss  of  his  position 
has  been  suddenly  rendered  unable  to  pay  his  debts. 

5.  There  is  also  a  great  lack  of  knowledge  of  the  need 
for  credit.  This  does  not  apply  to  buyers  who  pay  their 
bills  monthly  as  a  matter  of  convenience  instead  of 
paying  cash  for  each  individual  purchase,  but  to  those 
who  do  not  pay  promptly  because  they  have  no  funds 
with  which  to  pay.  Retailers  seem  hopelessly  ignorant 
as  to  whether  their  customers  are  able  to  pay  cash  or 
when  they  are  able  to  pay.  As  consumers  pay  no  more 
for  goods  they  buy  on  time  than  those  for  which  they 
pay  cash  there  is  no  inducement  for  them  to  pay  cash  as 
long  as  credit  is  given  them. 

6.  Retailers  have  ordinarily  no  facilities  to  find  out 
the  credit  standing  of  their  customers.  When  manu- 
facturers and  jobbers  give  credit  to  retailers  they  may 
proceed  with  greater  accuracy  as  mercantile  agencies 
furnish  information  on  the  credit  standing  of  all  busi- 
nesses.    Moreover,  they  have  other  sources  of  information 


PERSONAL  CREDIT  87 

which  are  described  elsewhere,  on  which  they  can  safely 
rely.  Those  who  receive  personal  credit  as  stated  above 
consist  of  the  rank  and  file  of  humanity,  and  no  facilities 
have  as  yet  developed  to  learn  their  credit  standing. 
It  is  safe  to  say  that  if  retailers  had  the  opportunity  they 
would  learn  if  their  customers  were  worthy  of  credit  or 
not. 

What  is  said  here  does  not  apply  to  department  stores 
and  other  large  retail  institutions  that  employ  agents 
to  investigate  the  standing  of  applicants  for  credit,  and 
who  employ  some  system  in  granting  credit.  Moreover, 
retailers  along  several  lines  in  some  of  our  cities  have 
formed  organizations  to  exchange  credit  information  and 
these  give  credit  with  a  great  deal  of  care.  The  work 
of  these  associations  will  be  discussed  later  under  the 
subject,  Credit  Exchanges. 

It  has  been  stated  that  there  are  no  definite  principles 

to  guide  the  retailer  in  determining  upon  credit  risks. 

As  far  as  can  be  learned  retailers  are  governed    __ 

&  What  de- 

by  three  sets  of  conditions:  1.  character;  2.    termines 

wealth  and  earning  power;  3.  character,  hab-    the 

its  of  payment,  habits  of  life,  and  habits  of    eranting 
....  of  credit, 

spending  or  buying. 

In  no  division  of  credit  does  so  much  depend  on  the 

character  of  the  applicant  as  in  personal   credit.     In 

other  cases,  wealth  and  ability  to  pay  are 

primary    requisites.     In     personal    credit    a 

man  without  wealth  or  apparent  ability  to  pay  may 

receive  credit  if  it  is  known  that  he  is  honest,  that  he 

treats  his  financial  obligations  very  seriously,  that  he 


88  MERCANTILE  CREDIT 

would  De  willing  to  do  almost  anything  than  to  fail  to 
pay  his  debts.  Such  a  person  may  enjoy  excellent  credit 
whereas  one  of  considerable  wealth  but  who  is  slow  in 
making  payments,  may  not  have  good  credit. 

The  latter  class  usually  enjoys  good  credit  because  in 
cases  of  emergency,  debts  can  be  collected,  and  frequently 
Wealth  a  declaration  of  intention  to  take  legal  action 
and  is  sufficient  to  secure  payment.     Individuals 

ability  to      with  ability  to  pay,  but  without  wealth,  are 

pay*  usually  those  of  good  incomes  obtained  by 
salaries  or  as  fees  by  rendering  personal  service.  Those 
whose  income  is  secured  through  fees  are  professional 
men  as  lawyers,  physicians,  dentists,  etc.  These  men 
ordinarily  enjoy  good  credit  because  as  a  rule  they 
receive  good  incomes  and  their  professional  honor  and 
standing  in  the  community  demand  that  they  meet  their 
obligations  promptly.  Those  who  work  for  salaries 
are  chiefly  ministers,  teachers  and  those  engaged  in  a 
high  grade  of  work  in  industrial  pursuits.  As  they  have 
regular  salaries  it  is  not  difficult  for  them  to  adapt  their 
expenditures  to  their  income.  As  long  as  their  salaries 
continue,  a  convenient  means  is  always  at  hand  to  a 
retailer  to  collect  payment  by  attaching  the  salary. 

The  previous  record  of  the  customer  is  perhaps  the  safest 
guide  to  the  retailer  in  giving  or  in  withholding  credit. 
If  the  seeker  for  credit  is  delinquent  in  mak- 
ing payments,  and  if  it  is  difficult  to  collect 
from  him,  credit  is  either  given  him  unwillingly  or  it  is 
withheld.  Where  credit  cooperation  methods  prevail,  this 
factor  is  considered  very  important  and  the  customer's 


PERSONAL  CREDIT  89 

record  with  other  retailers  in  this  respect  is  taken  into 
account  when  he  solicits  credit.  Upon  the  other  hand, 
if  the  consumer  pays  his  debts  promptly,  a  limited  amount 
of  credit  is  given  without  any  reference  to  his  wealth  or 
his  ability  to  pay. 

The  habits  of  life  of  the  buyer  and  of  his  family  are 
also  important  factors  determining  what  credit  should  be 
given.  Habits  of  life  include  personal  habits,  habits  of 
industry  of  the  bread  winner,  and  habits  of  economy  or 
of  extravagance  of  his  family.  It  is  sufficient  to  say  that 
if  the  bread  winner  has  good  habits  and  is  industrious, 
and  his  family  does  not  live  beyond  his  means  that 
ordinarily  good  credit  will  be  enjoyed.  Upon  the  other 
hand,  if  just  the  opposite  conditions  prevail,  or  any  one  of 
them,  such  a  family  should  be  given  either  no  credit  at 
all,  or  very  limited  credit. 

Closely  associated  with  the  extravagance  of  a  family 
as  a  guide  to  credit  giving  are  habits  of  purchasing.  If 
a  family  purchases  unwisely,  that  is,  purchases  what  it 
does  not  need  or  purchases  in  excess  of  its  needs,  it  is  an 
argument  in  favor  of  either  denying  or  limiting  the 
amount  of  credit  given. 

The  extensive  granting  of  credit  has  an  important 

influence   on   extravagance.     Compelling   customers  to 

pay  cash  imposes  on  them  the  obligation  to     _ 

.  ,.  ...  Granting 

adapt    their    expenditures   to    their    income.    of  credit 

Where  they  can  postpone  the  time  of  payment,    and 

this  postponement  begets  a  spirit  of  extrava-    extrava_ 

gance,  goods  are  purchased  beyond  the  power 

of  payment,  and  an  artificial  demand  is  created  for  goods 


90  MERCANTILE  CREDIT 

not  warranted  by  the  ability  of  consumers  to  pay  for 
them. 

In  mining  districts,  lumber  camps,  and  in  some  manu- 
facturing towns  a  kind  of  personal  credit  has  developed 
Credit  which    has    become    peculiarly   reprehensible 

given  by  on  account  of  its  influence  on  the  working  men. 
company  jn  these  centers  the  companies  owning  the 
plants  own  also  some  or  all  of  the  stores  and 
often  the  homes  where  the  wage-earners  live.  Credit 
is  freely  given  at  the  company  store  and  when  the  wage- 
earner's  income  is  received,  practically  all  of  it  goes  to 
pay  for  groceries,  drygoods,  rent,  etc.  On  account  of 
low  wages  and  the  free  granting  of  credit,  the  wage-earner 
is  frequently  behind  in  his  payments  for  these  things  and 
when  credit  has  become  imperative  for  him,  he  buys  exclu- 
sively at  the  company  stores,  and  because  he  is  not  free  to 
purchase  anywhere  else  he  pays  excessive  prices  for  his 
goods.  To  prevent  this  kind  of  exploitation,  many  states 
have  passed  laws  either  prohibiting  company  stores  al- 
together or  else  requiring  that  the  prices  charged  by  com- 
pany stores  shall  not  be  in  excess  of  the  prices  charged  for 
similar  things  at  competing  stores. 

Installment  sales  is  another  form  of  credit  which  is 

used  persistently  at  the  present  time.     Household  goods, 

furniture,  clothing,  books,  pictures,  jewelry, 

Install-  insurance,  etc.,  may  be  purchased  in  install- 
ment \  ,  -i 
sales.  ments,  and  some  houses  are  organized  specific- 
ally to  sell  their  products  in  this  way.  The 
usual  plan  is  to  require  a  cash  payment  and  then  a  cer- 
tain amount  each  month  until  goods  are  paid  for.     An 


PERSONAL  CREDIT  91 

agent  usually  makes  periodical  calls  to  obtain  these 
installment  payments.  For  larger  purchases  the  buyer 
usually  gives  a  chattel  mortgage,  and  in  the  event  of 
failure  to  pay  the  debt,  the  company  may  take  not  only 
the  goods  sold,  but  also  the  pledged  chattels.  In 
case  of  small  purchases  no  mortgage  is  given,  and  the 
seller  recovers  the  goods  sold  when  the  buyer  fails  to 
make  his  regular  payments. 

The  evils  of  installment  sales  are  twofold:  1.  It  is 
notorious  that  of  all  goods  that  are  sold  those  pur- 
chased on  the  installment  plan  are  obtained  The  evils 
with  least  reference  to  the  needs  of  pur-  of  install- 
chasers.  Only  a  dollar  a  month,  is  a  ment 
bait  which  has  induced  many  an  extrava- 
gant purchase.  In  the  mill  and  mining  towns,  organs, 
pianos  and  victrolas  are  purchased  by  wage-earners  on 
the  installment  plan,  and  prices  are  paid  for  these  things 
out  of  all  proportion  to  the  income  of  working  men's 
families.  In  all  cities  a  great  variety  of  things  are  sold 
to  poor  people  for  which  they  have  very  little  need,  be- 
cause the  burdens  of  payment  seem  to  be  light  because 
they  are  distributed  over  long  periods  of  time.  2.  The 
expenses  of  selling  on  the  installment  plan  are  heavy, 
and  the  consumer  pays  the  extra  costs  of  selling.  If  a 
chattel  mortgage  is  given  some  expense  is  incurred  in 
writing  the  mortgage.  If  the  goods  are  sold  by  agents, 
the  traveling  expenses  of  these  agents  must  be  paid.  As 
the  installments  are  usually  paid  to  agents  the  cost  of 
collection  by  these  agents  must  be  borne  by  the  pur- 
chasers.    As  the  losses  from  installment  sales  are  greater 


92  MERCANTILE  CREDIT 

than  from  other  sales,  these  excessive  costs  too,  must  be 
borne  by  the  installment  purchasers  who  pay  their 
obligations. 

The  chief  advertisement  of  many  retail  houses  is 
"We  will  give  you  credit"  or  "Your  credit  is  good." 
How  When  this  inducement  is  offered  to  buyers, 

credit  is  the  sellers  cannot  exercise  reasonable  care  in 
given  distinguishing  between  those  entitled  to  credit 

y.  an(j  those  not  so  entitled.  Moreover,  other 
stores  send  out  notices  to  prospective  customers  made  up 
from  lists  without  any  reference  to  credit  standing,  telling 
them  that  their  credit  is  good  at  the  stores.  Such  loose 
methods  in  giving  credit  stand  in  the  way  of  positive  re- 
forms in  systematizing  personal  credit. 

The  burdens  of  unwise  credit,  in  the  end,  rest  with  the 

consumer.     High  prices  to  consumers,  which  mean  a  high 

cost  of  living,  are  traceable  in  part  to  the  costs 

™„c.„~,~,  of  giving  consumers  credit.  Personal  credit 
consumer  °        ° 

bears  the     is  responsible  for  high  prices  in  the  following 
burden  of     ways:  1.  Consumers   who  pay  their  bills  pay 
..  in  terms  of  higher  prices  for  the  goods  of  those 

who  do  not  pay  their  bills.  Retailers  who 
give  credit  must  secure  a  fair  income  for  what  they  sell, 
and  on  this  account  prices  are  placed  high  enough  to 
cover  all  losses  and  to  make  a  reasonable  profit;  so  that 
those  who  pay  will  eventually  pay  the  bills  of  those  who 
cannot  pay  for  what  they  buy.  It  is  on  this  account 
that  many  consumers  who  pay  cash  refuse  to  patron- 
ize stores  that  give  credit,  realizing  that  they  are  paying 
other  people's  bills.     2.  Where  goods  are  sold  on  time 


PERSONAL  CREDIT  93 

an  interest  rate  is  charged,  and  the  prices  paid  cover  not 
only  the  value  of  the  goods  but  also  the  interest  charged 
on  the  loan  pending  payment  for  them.  3.  The  cost  of 
maintaining  a  credit  system,  including  the  cost  of  keeping 
books  and  of  collecting  bills,  is  added  to  the  price  of  the 
goods. 

It  is  difficult  to  estimate  the  extent  to  which  goods 
are  increased  in  price  by  the  costs  of  the  credit  system. 
Mr.  Daniel  B.  Murphy1  of  Rochester,  New  credit 
York,  quoting  from  reports  of  Mercantile  and  high 
agencies  showed  that  the  annual  losses  from  costs  of 
financial  failures  in  the  United  States  from  mn£- 
1890-1899  averaged  $178,871,026.70.  He  further  states 
that  "These  stupendous  figures — appalling  though  they 
be — do  not  include  the  untold  millions  that  are  absolutely 
lost  each  year  by  merchants  engaged  in  retail  trade,  in 
every  line  of  industry,  in  every  town  and  cross-road,  from 
ocean  to  ocean,  from  the  lakes  to  the  gulf,  comprising 
every  retail  enterprise  from  the  gigantic  department  stores 
in  our  great  cities  to  the  humble  rural  dealers.  These 
figures  do  not  include  the  very  considerable  loss  sus- 
tained by  those  engaged  in  the  learned  professions — 
notably  by  the  physicians  of  the  country — nor  do  they 
include  the  enormous  losses  of  a  personal  and  confidential 
nature,  that  are  not  submitted  to  the  gaze  and  scrutiny 
of  the  public." 

1  The  objects  and  possibilities  of  Credit  Men's  Associations,  1900. 


CHAPTER  VI 

THE  CREDIT  MAN 

The  credit  man,  like  many  of  the  leading  factors  of 

to-day,  came  into  prominence  as  one  of  the  inevitable  con- 

_        .         sequences  of  expansion  of  trade  and  concentra- 

Organiza- 

tion  of  tion  of  industry.     Before  the  traveling  sales- 

mercan-       man  evolved,  the  area  of  trade  occupied  by  the 
*ile  jobber  and  manufacturer  was  comparatively 

narrow.  The  merchant  visited  the  house, 
made  his  purchases,  and,  after  a  face  to  face  meeting  of 
buyer  and  seller,  the  terms  of  payment  were  arranged. 
When  the  merchant  ceased  to  visit  the  jobber  and  manu- 
facturer, the  simple  way  of  arranging  payments  was  aban- 
doned. The  traveling  salesman  now  stands  between  the 
jobber  or  manufacturer  and  the  retail  merchant,  while  the 
mercantile  agency  is  one  of  the  chief  sources  of  informa- 
tion on  the  credit  standing  of  the  retailer.  The  territory 
over  which  the  manufacturer  and  jobber  transact  busi- 
ness has  been  greatly  extended,  and  much  has  been 
gained  in  the  rapidity  of  business  methods.  The  rapid 
means  of  transportation,  the  lowering  of  the  charges  of 
shipping,  and  the  improvements  in  communication,  have 
all  been  responsible  for  this  enlargement  of  markets. 

These  changes  have  introduced  the  credit  department 
into  all  large  jobbing  and  manufacturing  houses.     The 

94 


THE  CREDIT  MAN  95 

head  of  this  department,  after  he  has  made  a  careful 

investigation  of  the  concern  seeking  credit,  is  intrusted 

with  the  task  of  approving  or  rejecting  its 

orders  for  goods.     To  him  is  intrusted  also     ,  or    °". 
P  ,  .  -  the  credit 

the  duty  of  watching  all  accounts,  of  collect-    man% 

ing  them  when  due,  or  of  extending  the  time 
as  the  conditions  seem  to  warrant.     In  all  houses  not 
of  sufficient  importance  to  have  a  regular  credit  depart- 
ment the  work  belonging  to  such  a  department  is  care- 
fully managed  by  other  departments. 

The  purpose  of  the  credit  man  is  to  keep  the  percentage 
of  losses  at  a  low  point.  To  do  this  not  only  must  he 
exercise  excellent  judgment  in  granting  credit,  but  he 
must  be  a  good  collector.  A  low  percentage  of  losses  is 
not  necessarily  the  criterion  of  a  good  credit  man.  He 
who  refuses  all  orders  except  from  those  houses  whose 
standing  is  known  to  be  absolutely  reliable  drives  away 
much  profitable  trade.  So  he  is  compelled  to  give  credit 
to  a  class  of  merchants  whose  credit  standing  is  not  of  the 
best,  but  upon  whose  trade  the  profits  exceed  the  losses. 
It  is  upon  orders  from  such  a  class  that  he  must  re- 
peatedly exercise  his  judgment  as  to  whether  the  prob- 
abilities of  profit  exceed  those  of  loss.  The  other  part  of 
his  task  lies  in  the  application  of  skill  in  collecting 
accounts.  Vigor  and  persistence  in  following  up  delin- 
quent debtors  and  tact  in  handling  them  are  requisites 
for  every  successful  credit  man. 

In  order  to  accomplish  these  things  the  credit  man 
must  be  in  possession  of  a  very  broad  range  of  facts.  He 
relies  upon  several,  sometimes  all,  of  the  following  sources 


96  MERCANTILE  CREDIT 

of  information:  reports  of  mercantile  agencies,  the  travel- 
ing salesman  of  the  house  employing  him,  the  attorney 
of  the  house,  an  attorney  in  the  community 

Sources  of  of  the  dealer,  the  debtor's  banker,  firms  with 
informa- 
tion, whom  the  debtor  has  dealings,  and  the  state- 
ment of  the  debtor.  All  these  means  of  pro- 
curing information  are  open  to  the  credit  man,  and  he 
uses  them  as  conditions  warrant. 

The  credit  man  must  be  familiar  with  the  laws  re- 
garding indebtedness  in  the  states  in  which  his  firm  deals, 
and  must  know  exactly  the  methods  of  pro- 
Laws  or        cedure  under  the  national  bankruptcy  law. 
different        _      .     .  ..  :  ,      , 

states.  *n  deciding  upon  terms  of  contract,  the  laws 

of  the  state  must  not  be  violated.  Houses 
often  fall  into  endless  difficulties  because,  not  having 
adequate  knowledge  of  the  state  laws  concerning  in- 
debtedness, they  fail  to  collect  many  of  their  debts.  A 
knowledge  of  the  laws  of  the  states  is  of  value,  not  only 
in  making  terms  of  payment,  but  also  in  assisting  the 
collector  to  determine  upon  proper  methods  of  pro- 
cedure. If  the  business  methods  and  customs  of  states 
and  localities  differ,  the  credit  man  must  be  cognizant 
of  these  facts,  and  must  understand  thoroughly  the  busi- 
ness peculiarities,  if  any  exist,  in  each  locality  in  which 
his  firm  has  business  dealings. 

He  must  be  familiar  with  the  industrial,  and  com- 
petitive conditions  upon  which  the  success  of  the  mer- 
chant depends.  He  must  know  what  need  there  is 
for  such  an  institution  in  the  city  or  the  part  of  the  city 
where  the  merchant  is  located.     He  must  know  if  the 


THE  CREDIT  MAN  97 

competition  in  the  debtor's  line  is  very  severe,  or  if  he  is 

located  in  a  splendid  field  for  his  business.      It  is   very 

generally  believed  that  department  store  and 

branch  store  competition,  and  the  competi-    con(jitions 

tion  of  merchants  who  purchase  collectively    where 

in  some  cities,  make  the  existence  of  certain    credit 

classes  of  dealers  precarious.     In  certain  cities    ,.     lcan 
1  lives. 

these  competitive  forces  act  more  strongly  in 
certain  lines  than  in  others.     These  are  factors  which 
must  be  taken  into  account  by  the  credit  man  in  giving 
credit. 

Furthermore,  the  industrial  character  of  a  community 
has  much  to  do  with  the  probability  of  success  of  the 
dealer.  If  the  community  is  conservative,  the  likelihood 
of  the  dealer's  being  able  to  pay  his  debts  is  much  greater 
than  if  it  is  not.  However,  there  is  much  less  proba- 
bility of  great  success  in  such  a  community  than  in 
one  of  a  different  type.  If  the  merchant  lives  in  a 
manufacturing  city  and  his  customers  are  to  a  large  ex- 
tent wage-earners,  his  ability  to  pay  will  often  depend 
upon  the  continuous  employment  of  wage-earners.  The 
character  of  the  industries  of  a  city  with  respect  to 
furnishing  continuous  or  intermittent  employment  exer- 
cises much  influence  upon  the  dealer's  ability  to  pay, 
and  over  this  influence  he  has  little  control.  If  the 
wage-earner  is  not  furnished  continuous  employment,  he 
cannot  pay  his  store  bills  regularly. 

If  the  dealer  lives  in  an  agricultural  community  or 
if  he  depends  directly  on  agricultural  trade,  crops  and 
prices  are  important  items  to  be  considered.      In  such 


98  MERCANTILE  CREDIT 

places  there  is  always  a  close  association  between  crops, 
prices,  and  trade.  If  crops  are  poor  or  prices  are  low, 
A  icul-  the  farming  trade  falls  off  heavily.  This  is 
tural  con-     strikingly    true   where    the   dealer   does   not 

ditions  handle  the  necessaries  of  life.     But  whether 

and  credit.  •  i  •  r    ir  i_      ji   j 

necessaries  or   luxuries  ot   lite   are   handled, 

more  credit  is  sought  under  these  conditions  than  when 
prices  are  high  and  crops  are  good.  The  general  welfare 
of  the  community  has  much  to  do  with  the  character  of 
the  goods  consumed,  but  this  is  a  problem  with  which 
the  credit  man  is  concerned  only  in  so  far  as  it  permits 
him  to  judge  of  the  purchasing  ability  of  the  merchant 
seeking  credit. 

The  certainty  of  the  ability  of  the  merchant  to  pay 
is  measured,  everything  else  being  equal,  by  the  char- 
acter of    the  customers — whether  regular  or 

Character     transient,  whether  made  up  of  the  wealthy, 

of  cus- 

tomers.        middle  or  lower  classes.     Transient  customers 

are  more  likely  to  pay  cash.  However,  if 
credit  is  given,  the  percentage  of  loss  is  greater  with 
transient  than  with  regular  customers.  Losses  are 
greater  upon  the  less  well-to-do  than  upon  the  middle 
and  upper  classes.  All  these  are  factors  which  the  credit 
man  takes  into  consideration  in  estimating  the  ability 
of  the  debtor  to  meet  his  obligations. 

The  credit  man  acquires  also  a  knowledge  of  the  char- 
acter of  the  particular  industries  seeking  credit.  He 
must  know  the  capital  required  for  a  given  business,  its 
running  expenses,  and  the  line  of  credit  that  ought  to  be 
carried   under  the   given  industrial   conditions.     From 


THE  CREDIT  MAN  99 

his  knowledge  of  these  things  he  judges  of  the  safety  of 
the  business  which  the  merchant  is  conducting. 

One  drawback  to  success  is  the  absence  of  bookkeep- 
ing and  the  inadequacy  of  accounts  that  merchants  keep, 
to  show  the  exact  status  of  their  business. 

Many  failures  can  be  traced  to  these  causes    .       " 

keeping 
alone.     Merchants  frequently  do  not   know    and  credit. 

from  their  books  whether  their  business  is 
profitable  or  unprofitable  until  it  is  too  late.  Good  book- 
keeping is,  and  ought  to  be,  an  excellent  aid  in  revealing 
wherein  success  or  failure  lies  in  business  methods. 
Failure  to  keep  books  hides  from  the  credit  man  the  real 
status  of  the  firms  with  which  he  deals.  He  knows  that 
in  giving  credit  the  probability  of  loss  to  him  is  greater 
when  a  merchant  does  not  keep  books  than  when  he  does. 
On  this  account  the  credit  man  must  often  discriminate 
against  such  a  merchant. 

As  the  ideals  and  moral  standards  of  communities 
differ,  credit  men  must  consider  the  character  of  com- 
munities.    If  a  great  many  business  men  in 

i  #  .1    i         ,  -    i  Moral 

a  community  have  failed,  and  most  of  them    standards 

dishonestly,  it  is  fair  to  assume  that  the  moral    of  the 

tone  of  such  a  community  from  a  business    commu_ 

point   of   view  is   not   high.     Social   control 

plays  a  prominent  role.     Many  dishonest  failures  are  an 

evidence  of  easy  standards  of  honor.     They  show  that 

the  public  opinion  of  the  community  has  been  on  a  plane 

too   low   to   pursue   relentlessly   those   whose    business 

morals  are  low.     The  record  of  the  merchant  and  his 

family  is  a  matter  of  importance.     The  man  who  has  not 


100  MERCANTILE  CREDIT 

failed  and  whose  family  record  is  clear,  views  with  com- 
punctions of  conscience  the  taking  of  steps  which  may 
lead  to  the  bankruptcy  court. 

It  is  not  difficult  to  determine  the  honesty  of  a  mer- 
chant.    The  character  of  his  dealings  with  the  house  of 
the  credit  man  or  with  other  houses  and  that 

on     y,     of   his   dealings   in  the  community  in  which 
as  a  mark  . 

of  credit.      ^e  ^ves>  reveal  his  business  character.     If  a 

man  has  been  in  business  some  time,  his  busi- 
ness morality  is  well  known.  If  he  is  a  beginner  in  busi- 
ness it  is  more  difficult  to  determine  what  he  would  do 
under  given  conditions;  but  judgment  upon  his  business 
morality  is  based  on  his  previous  record. 

The  way  in  which  a  man  secures  his  money  is  also  a  de- 
termining point  in  j  udging  of  his  ability.     If  he  has  earned 

his  money  it  is  fair  to  assume  he  will  conduct 

Business      &  sufficiently  conservative  business  to  guard 

ability  and 

credit.  against  losing  his  capital.    The  fact  that  he  has 

earned  it  is  itself  sufficient  to  stamp  him  as  a 

man  of  ability  to  produce  and  of  some  business  sagacity. 

It  is  recognized  not  only  in  business,  but  in  everything 

else  that  the  only  way  to  learn  to  do,  is  by  doing.     When 

essentially  new  problems  arise,   the  chances   of  doing 

wrong  equal,  if  they  do  not  exceed,  those  of  doing  right. 

Nothing  insures  success  in  any  business  better  than  past 

experience  in  dealing  with  all  the  problems  that  are  likely 

to  arise. 

There  are  those  who  seem  to  think  that,  for  a  man 

who  has  capital  to  start  with,  business  experience  and 

business  sagacity  are  unnecessary  for  success.     To  the 


THE  CREDIT  MAN  101 

prevalence  of  this  theory  may  be  traced  a  comparatively 
large  percentage  of  failures.  Many  act  upon  the  as- 
sumption that  the  business  of  merchants  is  simple. 
Although  they  have  failed  as  traveling  salesmen  or  in 
other  fields,  they  think  that  if  they  can  get  the  capital  to 
begin  with,  they  can  certainly  succeed  as  merchants. 
Credit  is  given  sparingly  to  such  men.  Another  class 
has  made  a  thorough  study  of  business  methods  and 
has  learned  the  details  of  business  through  experience 
as  employees.  When  men  of  this  class  begin  business, 
even  with  borrowed  capital,  the  presumption  is  favorable 
to  success. 

There  are  thus  four  classes  of  men  who  begin  business : 
(1)  Those  who  have  earned  their  capital  as  employees, 
in  which  capacity  they  may  learn  all  the  details  of  the 
business.  (2)  Those  who  have  learned  the  business  as 
employees,  but  who  begin  on  borrowed  or  inherited 
capital.  (3)  Those  who  have  earned  their  capital  in  other 
pursuits,  but  who  bring  to  the  business  no  experience  in 
it,  and  no  knowledge  of  the  business  methods  which  pre- 
vail there.  (4)  Those  who  have  not  earned  the  capital, 
have  no  experience  in  the  business,  and  who  know  little 
or  nothing  of  business  methods.  Only  experience  and 
ability  to  produce  entitle  a  man  to  credit.  The  second 
class  is  probably  more  likely  to  receive  credit  than  the 
third.  Experience  in  a  business,  a  knowledge  of  its 
details,  is  of  more  importance  to  a  merchant  than  hav- 
ing earned  capital  in  other  lines. 

After  a  merchant  has  been  in  business  for  some  time 
the  conditions  under  which  he  started  are  always  con- 


102  MERCANTILE  CREDIT 

sidered.  However,  the  credit  man  has  facts  more  tan- 
gible to  act  upon.  He  can  judge  of  the  merchant's 
ability  as  a  producer  from  his  sagacity  in  handling  the 
business.  The  amount  of  capital  in  the  business,  the 
running  expenses,  the  character  of  the  books  he  keeps, 
and  his  methods  in  general,  furnish  the  credit  man  a 
criterion  upon  which  to  act. 

A  knowledge  of  a  man's  credit  standing  in  his  own 
community  is  very  important  to  the  credit  man.  If  a 
Credit  debtor  can  borrow  at  his  bank  and  can  carry 

standing  a  good  line  of  credit,  his  credit  standing  is 
in  com-  certainly  good.  If  he  is  able  to  pay  his  debts, 
mum  y*  but  is  habitually  in  debt,  and  always  allows 
his  terms  of  discount  to  expire  before  payment  is  made, 
there  is  not  only  a  strong  evidence  of  carelessness  in  busi- 
ness, but  also  of  a  lack  of  business  sagacity.  When  a 
merchant  allows  terms  of  discount  to  expire  before  pay- 
ment, he  is  conducting  business  with  capital  upon  which 
excessive  rates  of  interest  are  paid,  and  the  business  is 
consequently  less  profitable  than  it  should  be.  If  he 
sells  on  credit  without  a  careful  investigation  of  the 
standing  of  his  customers  and  is  careless  in  making  col- 
lections, the  losses  in  his  business  are  unnecessarily  high. 
His  treatment  of  his  customers,  his  methods  of  adver- 
tising, the  organization  of  his  clerical  force,  the  general 
appearance  of  his  place  of  business,  are  all  things  pointing 
in  the  direction  either  of  success  or  of  failure. 

The  merchant's  sagacity  as  a  buyer  is  something  upon 
which  credit  men  are  well  informed.  If  he  is  an  easy 
buyer,  he  will  over-buy  and  have  on  hand  goods  which  he 


THE  CREDIT  MAN  103 

cannot  sell  except  at  a  loss.     If  he  lacks  judgment  in 

adapting  his  purchases  to  the  demands  of  his  customers, 

he  will  always  have  on  hand  unsalable  stock. 

As  said  before,  merchants  are  agreed  that  in       / 

'  °  a  buyer. 

a  large  number  of  cases  failures  are  due  to 
having  a  large  supply  of  unsalable  goods.  Although  job- 
bers will  always  sell  to  merchants  unsalable  goods,  the 
weakness  of  the  latter  in  purchasing  is  considered  a 
reason  for  discriminations  against  them  in  giving  credit. 
The  conditions  under  which  bank  and  mercantile 
credit  are  given  are  practically  identical.  In  some  ways 
the  jobber  has  the  advantage  of  the  banker 

in  knowing  the  producing  ability  of  the  mer-        n    anf 

•  •        i       i  •      mercantile 

chant,  an  advantage  which  he  gams  by  his    cre(jjt. 

opportunity  to  base  his  judgments  upon  the 
character  of  the  merchant's  purchases  and  in  his  skill  in 
bargaining;  in  other  ways  he  is  at  a  disadvantage.  As 
a  banker  lives  in  the  same  community  as  the  merchant, 
he  is  in  a  better  position  than  the  jobber  to  know  a  wider 
range  of  facts  concerning  him.  Then  too,  money  has 
acquired  the  right  of  dictating  conditions  in  bargaining 
not  yet  attained  by  merchandise.  It  is  clear  why  this  is 
true.  The  banker's  reputation  for  conservatism  must 
be  maintained  or  the  purposes  of  the  institution  are  de- 
feated. The  bank  holds  in  its  keeping  much  of  the  capi- 
tal of  the  community,  and  consequently  borrowers  are 
willing  to  concede  the  bankers  all  precautions  necessary 
to  safeguard  not  only  themselves  but  also  their  customers. 
Bank  failures  entail  a  more  serious  disorganization  of 
business   than   a  failure  of  a  jobber  or  manufacturer. 


104  MERCANTILE  CREDIT 

Another  difference  in  the  relative  power  of  dictation  of 
the  banker  and  jobber  is  to  be  found  in  their  competitive 
conditions  as  bargainers.  As  a  rule  the  jobber  goes  to 
the  merchant  to  sell,  while  the  borrower  of  a  bank  visits 
the  banker.  Loans  of  merchandise  are  always  connected 
with  sale.  Money  loans,  upon  the  contrary,  are  inde- 
pendent of  other  transactions. 

Since  the  right  to  be  inquisitive  on  standing,  character, 
etc.,  is  more  clearly  conceded  to  the  banking  than  to  the 
commercial  houses,  it  is  given  to  the  banks  to  fix  the 
degree  of  perfection  which  our  credit  system  attains. 
If  they  are  loose  and  careless  in  granting  credit,  it  is 
impossible  for  the  commercial  houses  to  be  strict  and 
careful.  To  the  banking  institutions,  then,  are  given 
the  responsibility  to  a  large  degree  for  better  customs,  a 
better  credit  system,  and  better  relations  between  cred- 
itors and  debtors. 

Upon  receiving  orders  from  a  merchant  who  has  had  no 
dealing  with  the  house  and  whose  credit  standing  is  un- 
known,  the  house  usually  requires  a  signed 

Value  of       statement   from    the   merchant.     Merchants 

the  signed  -...---  ... 

statement,    frequently  refuse  to  give  signed  statements, 

believing  that  requests  for  them  challenge  their 
honor.  This  feeling,  however,  is  passing  away.  Mer- 
chants whose  credit  standing  is  good  are  coming  to  see 
that  a  refusal  to  make  a  statement  injures  their  standing. 
If  they  can  pay  cash,  a  signed  statement  is  unnecessary. 
If  they  cannot,  it  is  to  their  interest  to  have  the  best 
terms  of  credit  a  condition  which  can  be  secured  only  by 
making  clear  that  they  will  pay  their  debts.     Merchants 


THE  CREDIT  MAN  105 

are  coming  to  see  that  their  best  interests  demand  a  fair 
statement  of  the  conditions  of  their  business,  and  credit 
men  have  discovered  that  the  signed  statement  is  the 
most  effective  means  of  guarding  against  losses. 

When  the  merchant  goes  into  bankruptcy,  a  signed 
statement  in  possession  of  the  creditor  gives  him  a  de- 
cided advantage.  A  false  statement  gives  a  creditor  a 
legal  right  to  bring  action  to  protect  his  claim  either  by 
attaching  the  property  of  the  bankrupt  or  of  rescinding 
the  sale.  In  the  latter  case  the  title  to  the  goods  does 
not  pass  to  the  debtor,  and  the  creditor  has  the  right  to 
recover  their  value,  provided  that  enough  remains  in 
stock.  To  do  this  it  must  be  proved  that  the  debtor 
knowingly  made  a  false  statement  without  any  grounds  for 
believing  he  could  pay  for  the  goods.  Fraudulent  intent 
is  the  basis  of  civil  action  under  the  national  bankruptcy 
law.  If  the  debtor  was  insolvent  at  the  time  the  goods 
were  purchased  and  the  statement  was  made,  an  evidence 
of  fraud  appears,  and  the  burden  of  proof  is  placed  upon 
him.  As  false  statements  are  damaging  to  debtors, 
statements  in  the  hands  of  creditors  improve  their  chances 
in  collecting  bad  debts. 

The  work  of  the  credit  man  in  investigating  the  stand- 
ing of  merchants  is  frequently  defeated  by  the  failure  to 
keep  books.     If  a  merchant  does  not  know 
his  own  financial  standing   it  is   impossible    f^*1™™  t0 
for  him  to  give  the  credit  man  an  accurate    books, 
report.     However,  the  demands  of  the  credit 
man  for  accurate  statements  are  a  strong  incentive  on 
merchants  to  keep  books  and  to  know  their  financial  status. 


106  MERCANTILE  CREDIT 

Those  who  took  the  census  of  small  manufacturers  and 
traders  for  the  United  States  Census  Bureau,  learned 
that  a  great  majority  of  them  did  not  keep  books.  On 
this  account  these  manufacturers  and  merchants  were 
unable  to  state  the  few  facts  concerning  their  occupation 
which  the  United  States  Government  wanted  to  know 
for  its  statistical  report  of  1900.  A  great  many  of  these 
people  did  not  know  the  extent  of  their  liabilities  or  their 
assets,  and  did  not  know  whether  they  were  conducting 
profitable  or  unprofitable  businesses. 

Some  claim  that  we  ought  to  have  a  system  for  verify- 
ing accounts  controlled  by  a  public  accountant;  that 

all  dealers  should  be  required  to  keep  books 
Books  ,  ...  . 

examined     to   De  opened  to  inspection  at  least  once  a 

by  public  year  by  accountants  appointed  by  the  state  or 
account-  national  governments.  Since  credit  rests  on 
the  confidence  one  man  has  in  another's  ability 
to  pay,  a  good  credit  system  cannot  exist  without  a  knowl- 
edge of  the  debtor's  resources  and  liabilities.  If  a  simple 
and  thorough  system  of  accounting  could  be  devised,  it 
would  be  an  excellent  trade  barometer  to  a  business 
house.  If  such  a  system  were  practicable  it  would  relieve 
the  credit  man  from  solving  many  perplexing  problems. 

Credit  men  occupy  a  unique  position  in  industrial 
society.  In  the  methods  employed,  they  either  induce 
Imoor-  a  nealthy  moral  tone  or  else  are  responsible 
tanceofthe  for  practices  which  result  in  heavy  losses, 
work  of  Merchants  who  buy  on  time,  and  who  need 
men.  no^.  ^  par^jclliar  m  paying  when  accounts 
are  due,  are  likely  to  overstock  and  to  buy  unsalable 


THE  CREDIT  MAN  107 

goods.  Credit  is  also  granted  indiscriminately  by  them, 
and  they  are  careless  in  collecting.  Here  is  seen  the 
utility  of  prompt  collections.  When  merchants  re- 
ceive credit  sparingly  and  must  pay  promptly,  they 
are  careful  in  granting  credit  to  consumers  and  are  care- 
ful in  collecting.  The  reactions  inhibited  by  promptness 
on  the  part  of  credit  men  are  thus  wholesome.  Looseness 
in  giving  credit  over-gluts  markets,  while  looseness  in 
collecting  produces  habits  of  indifference  and  carelessness 
in  business  which  degenerate  eventually  into  business 
immorality. 


CHAPTER  VII 

CREDIT  OFFICE 

The  purpose  of  the  credit  office  is  to  procure,  organize, 
and  classify  the  right  kind  of  information  so  as  to  make 
it  immediately  available  to  the  credit  man. 
Purpose       rp^-g  chapter  will  deal  with  the  mechanics  of 
office.  *ne  credit  office,  the  sort  of  filing  cases  to  be 

used  and  the  records  to  be  kept,  and  also 
with  the  class  of  information  to  be  secured,  its  classifica- 
tion, and  its  uses. 

The  organization  of  the  credit  office  depends  very  much 

upon  the  nature  and  size  of  the  business,  the  number 

of  credit  customers,  and  somewhat  upon  the 

Object  of  kakjts  and  inclinations  of  the  credit  man. 
a  system. 

The  mechanism  should  not  be  so  extensive 

as  to  be  cumbrous,  nor  should  it  be  inadequate  for  the 
purposes  of  the  office.  It  should  provide  for  such  a 
system  as  will  supply  the  credit  man  with  the  informa- 
tion he  needs  with  the  least  amount  of  effort. 

For  the  large  offices  there  have  been  worked  out  very 

definite  systems  which  differ  somewhat  in  detail  but  which 

agree  on  the  general  method  of  recording  and 

A  typical  fii}ng  information.  A  typical  system  is  the 
system.  ,  .  , 

following:  A   large   cabinet   is   provided   for 

filing  information  in  which  are  placed  large  envelopes 

vertically,  each  envelope  containing  all  the  information 

108 


CREDIT  OFFICE  109 

on  each  credit  case.  Each  envelope  has  a  number  cor- 
responding to  the  number  of  the  case.  A  cabinet  con- 
taining the  regular  sized  filing  cards  is  also  used.  The 
cards  are  arranged  alphabetically,  each  containing  the 
name  of  a  credit  case,  and  each  bearing  a  number  corres- 
ponding to  the  number  on  the  envelope  in  the  large 
cabinet. 

The  simplicity  of  the  system  commends  it.  When 
some  one  applies  for  credit,  the  alphabetical  arrangement 
of  the  small  cards  enables  the  office  clerk  to  turn  at 
once  to  the  card  bearing  the  man's  name,  and  the  number 
on  the  card  enables  him  to  turn  at  once  to  the  applicant's 
envelope  in  the  large  case  which  contains  all  the  infor- 
mation possessed  by  the  office  on  the  applicant.  This 
method  corresponds  to  those  used  by  charity  organiza- 
tion societies,  and  many  business  houses,  for  filing  in- 
formation. When  a  new  customer  applies  for  credit  his 
name  and  other  data  are  written  on  a  small  card,  which 
is  placed  in  the  cabinet  in  its  appropriate  place.  The 
number  of  the  case  is  written  on  a  large  envelope,  which 
is  intended  to  contain  all  the  information  concerning 
the  applicant  as  soon  as  it  is  collected. 

The  large  envelope  usually  contains  the  property 
statement  made  out  by  the  applicant  for  credit,  the 
information  obtained  by  the  traveling  salesman,  the 
information  given  by  the  mercantile  agencies,  and  in- 
formation furnished  by  references  given  by  the  applicant 
and  by  all  others  from  whom  the  credit  man  solicits 
information.  A  record  of  the  credit  given  the  applicant 
together  with  all  other  information  concerning  the  history 


110  MERCANTILE  CREDIT 

of  the  business  which  may  be  gotten  from  trade  papers 
and  a  variety  of  sources  is  also  placed  in  this  envelope. 

The  character  of  the  information  which  should  be  placed 
on  the  small  card  is  a  mooted  question.  Much  depends 
on  the  use  the  credit  man  desires  to  make  of  it.  It  may  be 
used  primarily  as  a  reference  to  more  complete  information 
in  the  large  filing  case;  or  it  may  be  a  complete  record 
of  information  for  certain  purposes.  In  the  latter  case 
it  may  contain  the  name,  the  address,  the  business,  the 
rating,  the  terms  of  credit  formerly  given,  and  a  few  of 
the  most  important  facts  usually  furnished  in  a  property 
statement  which  should  indicate  the  credit  standing  of 
the  customer. 

Not  all  credit  men  keep  record  cards.     If  the  volume 
of  business  is  large  and  the  number  of  customers  is 
small,  no  elaborate  office  machinery  is  neces- 
sary to  follow  each  case.     Again,  there  may  be 
systems 

differ.  a  ^arge  number  of  accounts  and  a  small  num- 

ber of  individuals  to  whom  sales  are  made; 
in  this  case  it  is  necessary  to  keep  but  few  records. 
But  even  where  there  are  a  large  number  of  sales 
and  many  customers  of  a  house,  the  practices  of  credit 
men  differ  widely.  Perhaps  the  majority  of  credit 
men  do  not  use  card  catalogues  at  all.  Most  of  them 
have  some  sort  of  filing  cases  or  use  letter  folders  where 
they  file  away  the  information  they  have  on  each 
credit  applicant.  Again,  many  credit  men  look  over 
their  ledger  accounts  of  the  candidate  before  passing 
judgment  upon  a  request  for  credit.  However,  in  an 
office  where  a  great  amount  of  business  is  transacted, 


CREDIT  OFFICE  111 

everything  favors  the  use  of  card  catalogues  and  filing 
cases  as  a  means  of  saving  the  time  and  energy  of  the 
credit  man,  and  of  permitting  him  to  give  accurate  judg- 
ments without  delay  on  applications  for  credit.  If  the 
credit  office  is  to  have  its  greatest  utility,  the  records 
must  be  kept  up-to-date,  and  this  will  require  consider- 
able activity  from  some  member  of  the  credit  office 
staff. 

The  committee  on  Credit  Department  methods  of  the 
National  Association  of  Credit  Men  has  been  laboring 
for  a  number  of  years  to  get  out  suitable 

property  blank  forms.     Blank  forms  to   be        Credit 

•    •  •  inquiry 

used  by  salesmen  in  obtaining  information       forms. 

from  customers,  attorney's  report  blanks,  and 
blank  forms  to  be  sent  to  persons  given  as  reference  by 
applicants  for  credit  have  been  devised.  A  great  variety 
of  blank  forms  is  used  for  all  these  purposes.  It  was  the 
intention,  however,  of  the  above-named  committee,  after 
receiving  suggestions  from  many  sources,  to  devise  such 
an  inquiry  form  for  each  purpose  as  would  enable  the 
credit  man  to  obtain  all  the  information  desired  with  as 
little  annoyance  and  inconvenience  as  possible  to  the  one 
called  on  to  make  a  report.  These  forms  have  been  re- 
vised frequently  and  have  been  submitted  from  year  to 
year  to  the  National  Association.  As  they  represent  the 
best  judgment  of  credit  men  for  the  purposes  for  which 
they  were  intended,  they  will  receive  consideration  in 
this  discussion. 

A  property  statement  is  one  usually  made  by  an  appli- 
cant for  credit  over  his  own  signature  showing  the  nature 


112  MERCANTILE  CREDIT 

and  kind  of  property  he  possesses,  his  assets,  liabilities, 

etc.     The  property  statement  is  considered  valuable  as 

a  basis  for  credit  for  two  reasons:     1.  no  one 

proper  y  .g  ag  £amjjjar  -^jth  ^he  financial  status  of  the 
statement. 

applicant  for  credit,  his  assets  and  liabilities, 

as  he  himself  is,  and  no  one  has  the  same  right  as  he  has 
to  give  such  a  statement;  2.  a  signed  statement  which 
misrepresents  the  facts  pertaining  to  the  possessions  of  the 
applicant  and  his  financial  status,  makes  him  criminally 
liable  for  obtaining  goods  under  false  pretenses  if  he  fails 
to  pay  his  debts.  A  great  deal  of  effort  has  been  made  in 
recent  years  to  make  it  customary  for  the  seller  of  goods 
to  demand  as  a  right  a  signed  statement  from  the  appli- 
cant for  credit.  The  latter  often  has  some  one  else  in  the 
office  sign  the  property  statement,  but  in  some  states 
the  man  who  fails  to  pay  his  debts  cannot  be  held  crim- 
inally liable  for  a  false  statement  of  his  property  which 
he  did  not  sign  personally. 

The  blank  form  for  a  property  statement  is  very  desira- 
ble in  order  that  the  right  kind  of  information  may  be  se- 
cured. Otherwise,  the  applicant  for  credit  makes  such  a 
statement  as  suits  his  purpose.  With  a  blank  form  before 
him,  a  refusal  to  sign  all  questions  makes  it  embarrassing 
for  the  buyer,  as  any  omission  gives  the  credit  man  a 
right  to  inquire  why  the  desired  information  was 
withheld. 

Form  I  gives  the  property  statement  form  recom- 
mended by  the  Committee  on  Credit  Office  Methods  of 
the  National  Association  of  Credit  Men.  All  property 
statements  contain  the  same  essential  elements.     This 


CREDIT  OFFICE  113 

form  calls  for  a  more  detailed  report  of  the  finances  of 

the  applicant  for  credit  than  most  property  forms. 

The  two  chief  divisions  of  the  report  are  the  active 

business  assets  and  the  business  liabilities.     Under  the 

former  head  are  included  the  value  of  the 

merchandise,  the  notes  and  accounts  due  the    , 

7  forms. 

business  concern,  its  cash  in  hand  and  in 
bank,  and  the  value  of  its  fixtures,  machinery,  etc. 
Under  the  head  of  business  liabilities  are  included  what 
is  owed  for  merchandise,  what  is  owed  in  hand,  what 
is  owed  others  for  borrowed  money,  and  what  is  owed  for 
taxes,  rent,  and  on  mortgages,  for  fixtures,  etc.  Other 
assets  included  in  the  report  are  the  real  estate  free  from 
encumbrances,  personal  property,  etc.  An  opportunity 
is  then  given  the  applicant  for  credit  to  state  the  grand 
total  net  worth  of  his  business. 

It  remains  then  for  the  credit  man  to  make  proper 
deductions  from  the  notes  and  accounts  receivable  and 
also  from  the  inventory  of  the  merchandise  and  other  cap- 
ital. In  considering  the  inventory  the  items  should  be 
valued  at  cost,  because  the  prospective  selling  value  is 
always  an  unfair  estimate  for  an  inventory.  If  the 
fixed  property,  including  buildings,  furniture,  fixtures, 
etc.,  has  depreciated  in  value,  the  inventory  should  show 
the  true  selling  value  of  such  property.  It  will  be 
shown  hereafter  how  other  phases  of  the  property  state- 
ment guide  the  credit  man  in  judging  the  value  of  the 
inventory. 

Much  depends  on  the  character  of  the  assets  of  the 
company  seeking  credit,  because  the  character  of  its 


To  RICH,  MANN  &  CO..  New  York 

For  the  purpose  of  obtaining  credit  for  goods  to  be  sold  roe  or  us  by  you.  or  for  «ny 
extension  granted  me  or  us  on  my  or  our  account  with  you,  the  following  is  given  you  as  a 
true  statement  of  my  or  our  assets  and  liabilities  and  general  financial  condition.  I  or  wo 
agree  to  and  will  notify  you  immediately  in  writing  ofany  materially  unfavorable  change 
in  my  or  our  financial  condition,  and  in  the  absence  of  such  notice,  or  of  a  new  and  full 
written  statement,  this  may  be  considered  as  a  continuing  statement  and  substantially 
correct 


Firm  name. 
Town 


-Date. 


.County- 


ACTIVE    BUSINESS   ASSETS 
Value  of  merchandise  on  hand  at  cost 
Notes  and  accounts,  cash  value 
Cash  in  hand 
Cash  in  bank 


Fixtures,  machinery,  horses  and  wagons- 
Total  Active  Business  Assets  — 


Dollars 

Cents 

! 

BUSINESS  LIABILITIES. 

Owe  for  mdse.,  open  aoct 
of  which  S  fa  past  dne 

Owe  on  notes  for  mdse. 

Owe  bank 


Owe  others  for  bor'd  money 
Owe  taxes  and  rent 


Mtges.on  fixtures,  machin'y, 
horses  and  wagons 


Total  Business  Liabilities. 


Net  Worth  in  Business, 


OUTSIDE    ASSETS. 
Total  real  estate,  assessed  valuation,  $. 
Total  encumbrances f> 


Personal   property. 
Other  assets  - 


Equity 


Grand  Total  net  worth  in  and  out  of  Business. 


Please  state  location  and  description  of  each  parcel  of  real  estate,  and  cash  valuation 
of,  and  encumbrances  on  each,  and  in  whose  name  each  parcel  is  held  ■ 


FORM  I. 

Property  statement  for  use  by  partnerships. 

114 


What  portion  of  real  estate  described  is  homestead. 


Have  yon  any  other  debts  than  herein  mentioned?. 


Full  given  and  surname  of  each  partner 


Age! 


Possible  liaothiY  ol  caco 
ried  ?         member  ot  firm  as 

indorser,  bondsman,  etc 


What  kind  of  business  do  you  conduct?. 
Insurance  on  stock.  ,, 


On  fixtures,  machinery,  horses  and  .wagons 


On  real  estate- 


Amount  of  sales  last  year- 


Amount  of  expenses 


last  year 

Date  of  last  inventory. 


What  proportion  of  your  salas  is  on  credit?. 


____^^_^^___    Have  you  any  judgments,  judgment 
notes,  chattel  mortgages,  or  other  liens  against  you,  recorded  or  unrecorded  ?    If  so,  describe 


If  you  have  pledged  or  transferred  outstanding  accounts  or  property 

remaining  under  your  control,  state  amount  thereof  and  amount  received,  or  to  be  received 

on  account  of  such  pledge  or  transfer 

What  books  of  account  do  you  keep? - , — 


Buy  principally  from  following  firms  : 

Nam* 

Address 

What  line  of 
business  1 

__^^^^^______^_^__^^_^-___ 

The  above  statement,  both  printed  and  written,  has  been  carefully 
read  by  the  undersigned,  and  is  a  full  and  correct  statement  of  my  or  our 
financial  condition  as  of — 1°1  — 


Finn  signature- 
By  whom  signed . 


.  a  member  of  the  firm. 


All  questions  must  be  answered,  insert  ciphers  in  absence  of  any  amount.  When  the 
words  "Yes,"  "No"  or  "None"  will  correctly  answer  the  questions,  write  them  in  their 
properploces. 

FORM  I.— (Continued.) 


115 


116  MERCANTILE  CREDIT 

assets  determines  in  large  measure  its  paying  ability. 

If  the  seeker  for  credit  is  overstocked,  as  a  rule  he  will 

be  slow  in  making  his  payments.     If  a  con- 

arac  er     gjdgrabie  portion  of  the  capital  of  the  trader 
of  assets 
important,    which  should  be  invested  in  the   business   is 

invested  in  outside  interests,  as  real  estate, 
stocks,  etc.,  these  investments  should  be  very  care- 
fully examined  by  the  credit  man,  as  they  may  be  of 
vital  concern  in  determining  whether  the  applicant  for 
credit  is  worthy  of  it  or  not.  It  is  generally  conceded 
that  credit  men  do  not  give  sufficient  attention  to  the 
assets  of  concerns  seeking  credit. 

For  convenience  in  determining  the  credit  worth  of  can- 
didates assets  should  be  divided  into  two  classes:  live  or 

quick  assets,  and  slow  or  fixed  assets.     "  The 

ive  and      grg^.  cjass  consists  of  that  character  of  property 
slow 
assets.         *or  which  there  is  a  steady  demand,  or  for 

which  under  all  ordinary  circumstances  there 
is  a  ready  market;  or  property  which  can  be  converted 
into  money  or  utilized  for  credit  purposes  on  short  notice. 
Such  assets  are  represented  by  cash,  marketable  mer- 
chandise, good  book  accounts,  securities,  and  any  other 
character  of  personal  property  subject  to  expeditious  sale. 
Slow  or  fixed  assets  are  those  for  which  there  is  not  a 
ready  sale,  especially  such  property  as  is  not  of  constant 
utilization  in  the  course  of  business.  They  consist  of 
furniture  and  store  fixtures,  buildings,  real  estate  and 
machinery,  and  investments  which  are  of  a  developmen- 
tal or  speculative  nature."1 

1  Prendergast :  Funds  and  Their  Uses,  p.  228. 


CREDIT  OFFICE  117 

While  credit  men  are  agreed  on  the  distinction  between 
the  two  classes  of  assets,  much  difference  of  opinion 
exists  among  them  with  reference  to  the  value  of  slow 
or  fixed  assets  in  estimating  a  credit  risk.  Some  are 
inclined  to  consider  them  of  no  value  whatever,  while 
others  would  discount  them  heavily  in  estimating  their 
value  as  a  basis  for  credit.  Still  others  consider  that 
they  have  merit  chiefly  in  case  of  a  failing  concern, 
as  they  materially  assist,  under  such  circumstances,  in 
liquidating.  Much,  too,  depends  upon  the  character 
of  the  business  conducted,  and  the  general  condition  of 
industrial  prosperity.  If  the  business  often  needs  capital 
on  short  notice,  large  investments  in  fixed  capital  are 
a  disadvantage.  In  periods  of  depression  it  is  difficult 
to  dispose  of  fixed  capital,  while  in  periods  of  prosperity 
certain  classes  of  fixed  capital  may  be  sold  on  short 
notice  at  good  values.  Everything,  however,  depends 
upon  the  proportion  of  slow  to  fixed  assets,  the  nature 
of  the  business,  the  condition  of  prosperity,  etc. 

In  property  statement  form  (I)  are  many  questions 
which  when  they  can  be  correctly  answered  result 
in  throwing  much  light  on  the  nature  of  the  assets  of  the 
credit  applicant  and  his  worth  as  a  credit  customer. 
It  is  important  to  know  what  portion  of  the  real  estate 
described  is  the  homestead  on  account  of  the  importance 
of  the  homestead  laws  of  the  various  states. 

One  question  calls  for  a  knowledge  of  the  insurance 

on    stock,    buildings,     machinery,    fixtures,    _ 

mi  •  ill-  Insurance, 

etc.     The  amount  of  insurance  held  is  very 

important  in  determining  a  credit  risk.     A  business  man 


118  MERCANTILE  CREDIT 

may  be  perfectly  solvent  and  doing  a  very  profitable 
business  and  from  every  other  point  of  view  a  good 
credit  risk,  but  if  he  does  not  carry  insurance  on  his  build- 
ings and  his  merchandise,  he  may  be  rendered  unable  to 
pay  his  debts  in  a  very  brief  space  of  time  by  a  fire.  It  is 
on  this  account  that  the  property  statement  calls  for  a  re- 
port on  the  insurance  on  goods,  on  buildings,  etc.  This 
feature  is  so  important  that  no  good  credit  man  to-day 
would  think  of  granting  credit  without  a  full  knowledge 
of  the  insurance  carried  by  the  credit  applicant. 

The  credit  man  should  know  in  what  company  the 
property  is  insured  and  whether  the  insurance  company  is 
solvent  or  insolvent.  He  should  also  know  the  value  of 
the  goods  carried  by  the  merchant  and  whether  this  prop- 
erty as  well  as  his  buildings  and  other  property  are  ade- 
quately covered  by  insurance.  Some  concerns  require 
that  their  traveling  salesmen  obtain  this  information  from 
customers  when  credit  is  requested,  and  practically  all 
the  property  statement  forms  at  present  request  this 
class  of  information. 

The  subject  is  deemed  of  sufficient  importance  by  the 
National  Association  of  Credit  Men  to  have  a  standing 
committee  on  Fire  Insurance.  This  committee  has  done 
efficient  service  in  urging  credit  men  to  require  merchants 
who  desire  credit  to  be  adequately  insured,  and  in 
securing  where  possible,  better  rates  from  fire  insurance 
companies  and  in  bringing  pressure  to  bear  to  have 
merchants  and  communities  take  such  precautionary 
measures  as  will  secure  to  them  better  rates  from  insur- 
ance companies. 


CREDIT  OFFICE  119 

The  property  statement  also  calls  for  the  date  of  the 

last  inventory  and  some  of  them  for  the  frequency  of 

taking  inventories.     This  is  important  to  the    _ 

.  Inventory, 

credit  man  as  he  should  know  how  often  the 

applicant  for  credit  estimates  the  value  of  his  property. 
Moreover,  as  his  report  must  be  based  on  the  last  inven- 
tory taken,  it  is  important  to  know  when  the  values 
were  placed  on  his  property.  It  is  further  required  that 
the  applicant  for  credit  state  if  there  are  any  judgments, 
judgment  notes,  chattel  mortgages,  or  other  loans  against 
him;  also  if  he  has  "pledged  or  transferred  outstanding 
accounts  or  property  remaining  under  his  control." 

The  property  statement  blanks  made  out  by  the 
National  Association  of  Credit  Men  require  the  applicant 
for  credit  to  state  what  books  of  account  he 
keeps.  This  is  important  for  various  reasons.  .  ? 
Failure  to  keep  proper  books  of  account  is  re- 
sponsible for  a  great  many  failures,  and  when  the  credit 
man  is  asked  to  give  credit  he  should  know  if  the  appli- 
cant for  credit  keeps  books  and  what  kind  of  books  he 
keeps.  This  question  is  now  of  great  importance  on 
account  of  its  relation  to  the  National  Bankruptcy  Act, 
as  under  the  Act  a  failure  to  keep  proper  books  is  an 
assigned  reason  for  refusing  a  discharge  to  a  debtor. 
Legislation  in  New  York  makes  it  an  evidence  of  fraud 
if  the  debtor  who  has  received  credit  upon  the  representa- 
tion that  he  keeps  books  fails  to  submit  his  books  within 
ten  days  after  a  requisition  has  been  made  upon  him  by 
a  creditor  whom  he  has  failed  to  pay. 

The  property  blanks  of  the  credit  department  methods 


TO  RICH,  MANN  ft  CO.,  New  York 

/  For  the  purpose  of  obtaining  credit  no*  and  hereafter  for  goods  purchased,  we  here* 

with  submit  to  you  the  following  statement  of  our  resources  and  liabilities,  and  will  im- 
mediately notify  you  of  any  material  change  in  our  financial  condition. 

In  consideration  of  your  granting  credit  to  the  undersigned,  we  agree  that  in  case  of 
Our  failure  or  insolvency,  or  in  case  we  shall  make  any  assignment  for  the  benefit  of  credit- 
ors, bill  of  6ale,  mortgage,  <ir  other  transfer  of  our  property,  or  shall  have  our  stock  or 
plant  attached,  receiver  appointed,  or  should  any  judgment  be  entered  against  us,  then  all 
and  every  of  the  claims  which  you  have  against  us  shall  at  your  option  become  immediately 
due  and  payable,  even  though  the  term  of  credit  has  not  expired.  All  goods  hereafter 
purchased  from  you  shall  be  taken  to  be  purchased  subject  to  the  foregoing  conditions  as 
a  part  of  the  terms  of  sale. 


Corporation    style . 


City. 


.  County . 


-State - 


'  BUSINESS  ASSETS 

Value  of  Merchandise  on  hand  at  cost 

If  manufacturing,  raw  material,  $  .  finished,  ( 

on  finished,  f 


Notes  and  accounts,  cash  value- 
Cash  in  *"""* 
Cash  in  bank 


Bills  or  accounts  receivable,  due  from  officers. 

Patents  and  patterns. 

Fixtures  and  machinery 


Total  real  estate,  cash  value  ___$_ 
Total  encumbrances  on  real  estate,  $. 


Total  Active  Business  Assets. 


Equity- 


Dollars 

Cents 

— 

— 

— 

1 

tUSINESS  LIABILITIES. 

Owe  for  mdse. ,  open  acct , 

of  which  $ is  past  due 

Owe  for  notes  for  mdse — 
Owe  banks  _____ 
Owe  for  bills  for  paper  sold 
Owe  others  for  bor'd  money 

Owe  taxes  and  rent 

Mtgs.  on  fixt's  and  mach'y 


Dollars 

Cents 

— 

Total  Business  Liabilities. 
Total  net  worth  . 


Please  state  location  and  description  of  each  parcel  of  real  estate,  and  cash  valuation 
of,  and  encumbrances  on,  each 


FORM  II. 

Property  statement  for  use  by  corporations. 

120 


Contingent  Liabil 


nay  i 


Accommodation  indorsements 

Indorsed  bills  receivable  and  outstanding. 


President  

Vice-Prest  _— 
Secretary  -*. 
,  Treasurer  _ 


OFFICERS. 


DIRECTORS. 


Authorized    capital 

How  paid  in :  Cash,  $ 

other  property,  and  how  valued- 


—    Subscribed — 
Other  property- 


Paid  in. 


Description  of 


laws  or  special  act  ?. 
Date  of  charter  ? 


In  whose  name  is  title  to  real  estate  held  ? 

-Incorporated  in  what  State  and  under  what  general 
.    Nature  of  business? 


-Suits  pending,  and  of  what  nature?. 


way 


Amount  of  annual  business. 


Are  any  merchandise  creditors  secured  in  any 


Annual  expenses. 


Annual  dividends. 


When  was  last  dividend  declared  ?_ 


Insurance  carried  on  merchandise  . 

Real  estate  ________   Regular  time  of  taking  inventory 

bank    accounts    ^m'th 


Rate. 
Fixtures  and   machinery 


Keep 


Keep    following  books   of    account. 


If  you  have  pledged  or  transferred  outstanding  accounts  or  property  remaining  under 
your  control,  state  amount  thereof  and  amount  received,  or  to  be  received,  on  account  of 
such  pledge  or  transfer 


Buy  principally  from  following  firms  : 

Name 

Address 

What  line  of 
business? 

The  above  statement,  both  printed  and  written,  has  been  carefully  read  by  the 
undersigned,  and  is    a    full    and   correct   statement  of    our   financial    condition  as  of 


-191- 


Corporation  Signature- 
By 


All  questions  must  be  answered,  insert  ciphers  in  absence  of  any  amount  When  the 
words  "Yes,"  "No"  or  "None"  will  correctly  answer  the  questions,  write  them  in  their 
proper  places. 

FORM  II.— (Continued.) 


121 


122  MERCANTILE  CREDIT 

committee  of  the  National  Association  of  Credit  Men 
require  the  signature  of  a  member  of  the  firm  seeking 
credit  in  the  name  of  the  firm  under  the  following  affir- 
mation: "  The  above  statement  both  printed  and  written, 
has  been  carefully  read  by  the  undersigned,  and  is  a  full 
and  correct  statement  of  my  or  our  financial  condition." 
Property  statement  Form  II  is  devised  for  use  by  corpora- 
tions and  is  intended  to  procure  practically  the  same 
class  of  information  as  is  to  be  secured  by  Form  I. 

The  credit  man  of  any  well-regulated  office  will  not 

content  himself  with  obtaining  information  from  a  single 

source  but  will  collect  information  on  credit 

rave  ng     appiicants    wherever    it    is    available.     The 
salesman.        x  * 

traveling  salesman  as  a  source  of  credit  in- 
formation will  be  discussed  later.  In  order  to  secure  the 
credit  information  desirable  or  possible  for  him  to  obtain, 
blank  inquiry  forms  have  been  made  out  of  which  Form 
III  is  a  sample.  These  blanks  especially  are  relatively 
brief.  They  require  the  salesman  to  ask  the  buyer  a 
number  of  questions  and  other  portions  of  the  blank  can 
be  filled  out  by  the  salesman  himself.  These  blanks  can 
be  filled  out  quickly  by  the  salesman,  and  it  will  at  once 
occur  to  the  reader  which  questions  the  salesman  can 
answer  upon  observation  and  which  he  must  ask  the 
purchaser. 

Attorneys  residing  in  the  locality  of  the  credit  applicant 
have  always  been  a  source  of  credit  information.     The 

work  of  the  attorney  enables  him  to  possess 

a  great  deal  of  information  of  interest  to  the 
attorneys.         ° 

credit  man.     Special  credit  inquiry  forms  are 


CREDIT  OFFICE 


123 


The  CarppbfcTT  frert  Co. 

New    Customer    Report- 
To  be  6lled  oat  and  sent  a»  with  each  oew  customers  order,  or  change  of  firm.     Do  this  to  help  us  tntke 

prompt  shipments. 


Address  _ 
R.  P.  D.. 


(Give  N;unes  in  full.) 


Individual  t(  Firm,  or  Officers  if  Corporation. 
AGE  (about) MaRRIED_ 


I.  Owns  shop  worth  about  8.  —  -■■■ 

%  Owns  home  worth  about .     ■  % . 

*.  Encumbrances  on  shown        ,  ■      .     t. — — — 

4.  Stock  worth  about * 1 

».'  Kind  of  Business_„ , 

«.  Does  owner  devote  all  his  time  to  this  business  ?. 

7.  WhatisUxal  standing? . , — 


%.    Has  he  good  ability  ? 

9.    Doeshednnkor  gamble 
10.     Has  been  dealing  with  _ 


13.  Is  location  good? 

14.  Does  he  get  good  profits?. 
16.     Banks  with 


10.     Local  crop  prospects. 
17.    is  customer  colored  ?_ 


19.    Wow  long  in  business?  7**" 

19.    What  is  your  opinion  of  customer?  (Answer  on  Teverse  side.) 

— ■ — . — - Salesman. 


FORM  III. 

Property  statement  form  for  use  by  salesmen. 


124 


MERCANTILE  CREDIT 


St*.  No.  100.522  DETACH  AND  SEND  REPORT  BELOW  TO 

ART  BRASS  COMPANY, 


Expires  Sept  1,  1913 


299  t.  134thStr«t. 


Name  of   party   reported  _ 


19- 


ATTORNEY    WILL    PLEASE    DETACH.    READ    AND    I ILE    TF.S    STUD.    AND    NOT    D1WLCE   NAME   OF    INQUIRER 


Confidential    "Form    A" 


Watson,    Stouffor   ft   Dot  la  , 


New  York. 


Uarch    4,1913. 


.!=*_ 


Expires  ScpL  1.  1913 

At   Ne>»   First   National   Bank    Bldg. ,    Colmnbufl,    Ohio. 

Dear  Sir:  —  Kindly   Uvor   ui   with    as   full    »  report  u  pruabV  of    (he  party,   of  6rm,   named    below,   which  we  pledge  yoy  wo 
will   treat    in  the  strictest    confidence.        Mid    to   us  in  enclosed  tUmped  euvelope.       Wc  will  gladly  reciprocate   your  fattM—  whetv 

eve,  opportuDUy  occur*.     A  p.nmpt  reply  w,U  be  duly  appreciated  Subscriber's  No.  \QQ  522 

Name 

Address . , , 


I.  r  till  individual  name*  ? 

3    How  long  in  business  ' 

A     Habits  and  business  ability  ' 

b.   Estimated  value  ol  stock  > 

6    Repute  as  lo  promptness  > 

7.   Any  home  debts  owing  > 

6-  Ever  sued  '  -,,-,—  .    - 

9.  Ever  tailed' 

10    Netunencumbered  value  of  real  estat 
I  I.   Any  resources  outside  ot  business  ?- 
I Z.  What  u  your  idea  ot  net  worth  >  — 
13.  Getting  ahead  ? 
Other  iruonnaiioo  


Ir.ilmed  to  speculate  t- 


Any  claims  in  attorney  i  hands  f 

It   so.  give  particular!  ?    

ll  so.  give  particulars?    


*  itattoMrr.  typwwriWs  tf  poufcU,  but  c 


FORM  IV. 
Business  statement  form  for  use  by  attorneys. 


CREDIT  OFFICE  125 

manufactured  for  use  by  attorneys,  of  which  form  (IV) 
is  a  sample.  It  is  the  custom  in  some  places  to  mail  with 
the  credit  inquiry  form  a  check  for  one  dollar,  which  is 
considered  a  fair  compensation  to  an  attorney  for  the 
service  he  renders.1 

It  is  a  common  practice  for  new  applicants  for  credit 
to  give  references  to  business  men  with  whom  they  have 
had  dealings.     In  the  absence  of  special  forms 
for  this  purpose  the  information  solicited  by  the 
credit  man  varies  greatly,  is  usually  brief,  and 
is  likely  to  contain  little  of  value.      To  suit  this  need 
Form  V  was  adopted  and  recommended  by  the  National 
Association    of    Credit    Men.     It    is    brief    and   self- 
explanatory. 

The  following  is  a  typical  method  of  procedure  of  the 
best  credit  offices  in  the  opening  up  of  new  accounts. 
With  his  order  for  goods  from  a  new  customer,  the  sales- 
man is  required  to  send  in  his  credit  report  of  the  cus- 
tomer. If  the  order  is  for  immediate  shipment  and  the 
salesman's  credit  report  is  complete  and  satisfactory,  the 
goods  will  be  shipped  at  once,  and  then  a  fuller  report  on 
the  credit  risk  is  obtained  for  future  use.  If  the  order  is 
for  shipment  in  the  future  or  if  the  credit  report  of  the 
salesman  is  unsatisfactory,  a  further  investigation  of 
the  credit  standing  of  the  buyer  is  made  at  once.  The 
standing  of  the  credit  applicant  is  investigated  first  in 
the  reports  of  Dun  and  Bradstreet.  If  these  are  inade- 
quate or  unsatisfactory,   special  reports  are  requested 

1  This  subject  will  be  more  fully  discussed  under  the  head  of 
Sources  of  Credit  Information. 


126 


MERCANTILE  CREDIT 


RETURN  THIS  TO  US 

St  Louis, 


-19T 


Messrs- 


Kindly  give  us  below  YOUR  EXPERIENCE  with 
Name . 

P.  O _ B. a_ 


ALL  INFORMATION  WILL  »B  CONSIDERED  STRICTLY  CONFIDENTIAL 

Yours  truly, 


National  aosocn 


'  Credit  Mbn 


GOOD  FORM  &  CO. 

National  Association  or  Credit  Mm 


Sold  Since. 
Terms 


Highest  Recent  Credit  $ 

(  On  Open  A 
Owing  Now< 

( On  Notes, 


Past  Due . 


P 

(O 


On  Open  Ace 

n  Notes, 


First  Order,  $. 


Other  Information- 


This  form  can  he  obtained  only  from 
National  Association  of  Credit  Men, 
41  ParkRoTiyJfewJfork, 


at  the  following  prices : 
50(F-$3.Z5 


TOOfF^BTiRT 


MANNER  OF  PAYMENT 


Discounts 

Prompt  and  satisfactory 

Slow  bat  considered  good 

Slow  end  unsatisfactory 

Pays  C.  O.  D. 

Sell  for  eeab  only 

Account  secured 

Notes  secured 

Account  closed  for  cause 

Makes  unjust  claims 

Collected  by  attorney 


FORM  V. 
Business  statement  form  to  be  used  by  those  given  as  references 
and  others  who  have  had  business  relations  with  credit  applicant. 


CREDIT  OFFICE  127 

from  either  or  both  of  these  agencies.  The  credit  report 
of  the  salesman  should  always  contain  a  list  of  references 
given  by  the  buyer.  These  are  written  to  at  once.  Using 
blank  forms  similar  to  Form  IV  the  office  writes  to  an 
attorney  in  the  town  where  the  credit  applicant  con- 
ducts his  business  and  also  to  an  attorney  in  a  town 
where  he  formerly  conducted  a  business.  A  banker  of 
the  community  of  the  buyer's  place  of  business  may  also 
be  written  to  with  reference  to  the  prospective  customer. 
From  these  various  statements  and  from  the  property 
statement  obtained  from  the  credit  applicant  prior  to  the 
shipment  of  goods  or  after  they  are  shipped,  the  credit 
man  determines  whether  credit  shall  be  given  and  if  so 
what  the  amount  of  the  credit  shall  be.  These  reports 
are  then  all  filed  away  in  the  large  envelope  used  by 
the  credit  man  for  information  concerning  his  credit 
customers. 

Another  document  of  value  to  the  credit  man  in  grant- 
ing credit  is  the  comparative  property  statement  form. 

The   larger   mercantile   houses   and  banking 

Compara- 
mstitutions   appreciate  the  value  of  the  com-    tive 

parative  statement  form.  Well -organized  property 
credit  offices  require  a  property  statement  statement 
once  a  year  from  those  who  receive  credit 
from  them,  and  when  occasion  warrants  it,  more  fre- 
quently. The  comparative  statement  form  is  a  large 
sheet  in  which  is  placed  in  a  single  column  the  essen- 
tial facts  from  a  property  statement  giving  the  finan- 
cial standing  of  the  applicant  for  credit.  As  the  num- 
ber of    columns  corresponds  to  the  number  of  years 


128  MERCANTILE  CREDIT 

for  which  a  comparison  of  standing  is  desirable,  it  is 
possible  for  the  credit  man  to  prepare  a  comparative 
statement  form  covering  any  number  of  years. 

Where  comparative  statement  forms  are  kept  it  is 
necessary  for  the  credit  office  to  have  one  comparative 
statement  for  each  customer.  The  information  from  the 
property  statement  is  usually  copied  by  some  one  in  the 
office. 

Banks  were  the  first  to  use  the  comparative  statement 
forms,  and  they  are  used  to-day  by  them  to  a  much  greater 
extent  than  by  mercantile  houses.  This  is  perhaps  due 
to  the  fact  that  credit  customers  of  banks  are  more  will- 
ing to  submit  property  statements  than  are  customers 
of  mercantile  houses,  and  the  property  statement  fur- 
nished the  bank  conforms  more  to  a  standard  type 
than  those  submitted  to  mercantile  houses.  The  latter 
have  only  recently  acquired  the  privilege  of  receiving 
property  statements  from  their  credit  customers,  and 
consequently  the  dates  for  comparative  statements  have 
been  received  only  recently  by  merchants. 

In  the  absence  of  a  comparative  statement  the  credit 
man  usually  compares  the  recent  property  statement 
with  those  of  previous  years.  The  comparative  state- 
ment is  valuable  to  him  because  at  a  glance  he  can  com- 
pare the  various  elements  over  a  series  of  years  upon 
which  a  credit  risk  depends. 

Credt  Banks  and  mercantile  houses  have  for  a 

lines  or       number  of  years  been  granting  to  their  credit 

limita-  customers,  credit  lines  or  limitations.     These 

credit   lines  or  limitations  are  the  maximum 


CREDIT  OFFICE  129 

amounts  which  a  banking  or  mercantile  house  will  loan 
to  a  customer  at  any  time.  These  lines  are  determined 
upon  by  credit  men  after  a  thorough  canvass  of  the 
value  of  a  customer  as  a  credit  risk. 

When  a  credit  line  is  determined  upon,  the  policy  of 
mercantile  houses  differs  widely  with  reference  to  it. 
Some  treat  it  as  a  danger  signal  and  act  accordingly. 
In  some  cases  where  the  credit  line  is  determined  upon 
the  bookkeeper  alone  passes  on  accounts  only  to  see 
that  loans  are  within  the  prescribed  limits.  In  the 
great  majority  of  cases,  however,  all  loans  within  the 
credit  limits  receive  the  attention  of  the  credit  man, 
and  to  many  it  is  deemed  highly  expedient  that  they 
should  receive  his  consideration.  The  credit  line  should 
be  considered  a  fixed  or  a  permanent  matter.  It  is  sub- 
ject to  change,  however,  with  changing  conditions  and 
circumstances,  and  if  the  credit  man  would  fix  these  lines 
wisely,  he  must  know  about  the  purchases  of  each  credit 
customer,  the  time  allowed  him  for  his  payments,  and 
his  promptness  in  paying  his  bills. 

Credit  lines  have  not  been  standardized.  What  is 
allowed  a  customer  depends  somewhat  on  the  whim  of 
the  credit  man.  So  many  factors  enter  into  a  credit 
risk  that  no  definite  rules  have  ever  been  evolved  that 
will  enable  credit  men  to  act  with  system  in  determining 
what  credit  should  be  granted.  The  conditions  differ 
so  widely  in  the  sale  of  different  classes  of  goods  that 
rules  which  would  guide  credit  men  in  granting  credit  to 
grocers  might  be  very  unsafe  to  hardware  men.  As  a 
rule,  lines  of  credit  can  be  granted  for  larger  amounts 


130  MERCANTILE  CREDIT 

where  the  terms  of  credit  are  for  brief  periods  and  where 
the  goods  are  turned  many  times  a  year,  than  where  the 
credit  terms  are  long  and  where  the  stock  of  goods  is 
turned  infrequently. 

When  credit  limits  are  fixed  they  are  changed  fre- 
quently or  are  not  respected.  The  circumstances  change 
so  often  that  credit  may  be  given  to  one  customer  far  in 
excess  of  the  credit  limit,  while  another  customer  may 
be  denied  a  loan  up  to  the  credit  limit.  The  factors  con- 
sidered have  to  do  with  the  extent  to  which  the  credit 
applicant  is  a  customer  of  the  house  granting  credit,  with 
the  terms  of  credit  he  desires,  his  promptness  in  paying, 
crop  conditions,  labor  conditions,  condition  of  prosperity, 
condition  of  competition  where  he  conducts  his  business, 
opportunities  for  the  business  where  he  is  located,  and 
with  the  degree  of  prosperity  of  his  business.  An  in- 
crease or  a  decrease  of  the  credit  risk,  and  a  regard  for 
the  credit  limit  granted  to  a  specific  customer  depend 
upon  the  above-named  factors.  Although  subject  to 
change,  credit  limits  serve  a  useful  purpose  in  controlling 
the  policy  of  the  credit  man  within  certain  limits. 

Banking  institutions  are  now  establishing  credit  de- 
partments with  credit  men  in  charge.  Some  banks  in 
our  large  cities  have  had  such  departments  for 

Credit  de-    many  years:  but  it  has  only  been  within  the 

partments 

of  banks.      ^as^  fifteen  years  that  the  credit  department 

has  been  considered  an  essential  feature  in 

large  commercial  banks.     Where  such  departments  do 

not  exist,  the  work  of  a  credit  department  is  handled  by 

officers  of  a  bank  in  connection  with  their  other  duties. 


CREDIT  OFFICE  131 

This  is  especially  the  case  with  the  smaller  banks  of  the 

country,  and  it  is  not  at  all  likely  that  the  smaller  banks 

will  ever  find  it  profitable  to  organize  an  independent 

credit  department. 

In  the  interests  of  good  banking  there  are  many  reasons 

for  the  organization  of   good  credit   departments:     1. 

Where  loans  are  made  by  one  or  two  officers  of 

Why 
a  bank,  who  use  no  system  but  retain  valuable    banks 

information  in  mind,  this  knowledge  may  be    should 

lost  to  the  bank  if  the  officer  who  has  charge  of    ^ave 

credits  dies  or  resigns.     With  a  credit  depart- 

°  ^  partments. 

ment  and  a  credit  system  this  information  is 
preserved.  2.  The  profits  of  a  bank  are  determined  by 
the  wisdom  of  its  investments,  and  these  are  made  at 
greatest  advantage  where  those  in  charge  of  the  invest- 
ments have  full  knowledge  of  credit  risks.  3.  Large 
banks  have  also  the  responsibility  of  advising  country 
banks  which  deal  with  them  with  reference  to  the  value 
of  commercial  paper  which  they  buy  and  other  invest- 
ments which  they  make.  They  are  also  called  on 
frequently  by  their  customers,  their  depositors,  to 
give  advice  on  investments.  Ability  to  guide  others 
safely  requires  not  only  a  thorough  knowledge  of  in- 
vestment conditions,  but  a  suitable  system  to  preserve 
this  knowledge. 

The  credit  department  of  banks  is  not  so  well  es- 
tablished as  the  credit  department  of  mercantile  and 
manufacturing  houses,  but  where  such  a  department 
is  established  in  large  commercial  banks,  the  work  is  as 
thoroughly  differentiated  and  organized  as  in  the  credit 


132  MERCANTILE  CREDIT 

departments  of  either  mercantile  or  manufacturing 
establishments. 

Most  banks  with  credit  departments  demand  a  prop- 
erty statement  from  prospective  borrowers.  The  en- 
dorsement by  the  American  Banker's  Association  and 
Association  of  State  Bankers  of  the  policy  of  requiring  a 
property  statement  gave  a  sanction  to  this  policy  which 
many  of  the  banks  both  within  and  without  these  asso- 
ciations had  the  wisdom  to  accept.  The  method  of 
obtaining  a  property  statement  ordinarily  differs  from 
the  method  employed  by  the  credit  department  in  a 
mercantile  establishment.  When  a  new  candidate  seeks 
credit  in  a  bank,  he  is  usually  turned  over  to  the  credit 
man  who,  using  a  blank  form,  obtains  answers  from  the 
applicant  regarding  his  financial  condition  and  his  reasons 
for  credit,  etc.,  and  then  obtains  his  signature  to  his  re- 
port. He  usually  is  requested  to  call  later  for  an  answer. 
In  the  meantime  the  credit  man  learns  what  he  can  of  the 
applicant  personally,  his  business  history,  his  business 
ability,  his  reputation  in  his  community  for  honesty, 
etc.,  his  habits  and  his  moral  character,  and  then  gives  or 
withholds  credit  depending  upon  what  he  learns. 

The  credit  departments  also  obtain  information  on 
specially  prepared  blanks  from  other  banks  with  whom 
the  customer  has  dealings,  from  references  given  by  the 
applicant  for  credit,  from  other  business  houses  which 
have  a  knowledge  of  the  credit  standing  of  the  candidate, 
and  from  mercantile  agencies  like  those  of  Bradstreet  and 
Dun.  These  credit  departments  often  obtain  property 
statements  once  a  year  showing  the  financial  condition  of 


CREDIT  OFFICE  133 

their  borrowers.  These  are  tabulated  and  comparative 
statements  are  made  out  covering  several  years.  One 
question  found  in  some  of  the  property  statements  ask- 
ing how  often  the  accounts  of  the  concern  are  audited 
and  when  they  were  audited  the  last  time,  is  especially 
significant. 


CHAPTER  VIII 

SOURCES  OF  CREDIT  INFORMATION 

MERCANTILE  AGENCIES 

The  mercantile  agency  is  an  institution  organized  to 
investigate   the  financial   standing,   the  business   char- 
acter, and  habits  of  business  men.     To  put 

what  the     ^e  ma^er  briefly,  it  is  a  credit  information 

agency 

does,  bureau.     There  are  two  classes  of  agencies, 

the  general  agency  and  the  special  agency. 

Of  the  first  class,  the   two    conspicuous   examples   are 

the  Bradstreet  and  Dun  agencies.     The  special  agency 

obtains  credit  information  in  a  special  line  of  business, 

as  furniture,  shoes,  coal,  etc.     Because  it  specializes,  it  is 

more  efficient  than  the  general  agency  in  procuring  and 

distributing  information  of  a  detailed  character. 

The  agency  will  be  discussed  here  from  three  points 

of  view: 

1.  The  economic  conditions  which  gave  rise  to  it, 
and  its  development  to  meet  the  needs  peculiar  to  the 
United  States. 

2.  The  methods  of  the  agency — its  organization  to 
procure  and  distribute  credit  information. 

3.  The  utility  of  the  agency  to  the  business  world. 
The  mercantile  agency  did  not  exist  before  the  crisis 

of  1837.     The  industrial  area  of  the  United  States  at 

134 


SOURCES  OF  CREDIT  INFORMATION    135 

that  time  did  not  extend  far  into  the  West.  Cincinnati 
was  then  the  great  western  city  of  trade  with  a  popula- 
tion in  1840  of  46,000.  Chicago  and  St. 
Louis  were  small  trading  ports,  the  former  conditi0ns 
having  a  population  of  4,470,  and  the  latter  responsi- 
of  16,469.  Prior  to  the  crisis  of  1837,  the  bleforthe 
western  and  southern  traders  visited  the  job- 
bers and  manufacturers  of  the  East  twice  a  year  to  make 
their  purchases.  After  the  seller  had  a  few  minutes' 
talk  with  a  merchant,  terms  of  credit  were  agreed  upon 
which  usually  required  payment  for  the  goods  upon  the 
return  of  the  merchant  when  he  purchased  again.  The 
relations  between  the  jobber  and  the  western  retailer, 
between  seller  and  buyer,  were  personal  ones.  Credit  was 
granted  because  the  jobber  had  confidence  in  the  honesty 
of  the  trader  and  in  his  ability  to  conduct  a  successful 
business.  When  a  merchant  started  in  business,  if 
credit  was  desired,  he  took  letters  of  recommendation  from 
his  fellow  merchants  to  their  jobbers  in  the  eastern 
trading  centers.  If  retailers  lived  remote  from  jobbing 
centers,  their  purchases  were  restricted  to  the  few  job- 
bers with  whom  they  had  established  personal  relations. 
While  the  traders  of  the  South  and  West  continued  to 
visit  the  jobbers  of  the  East,  the  relations  between  the 
buyer   and   seller   were   very   different   from 

p6rson3.1 

those    we    understand    today    to    be    purely    reiati0ns 
business  ones.     The  trips  of  the  retailers  to    between 
the  houses  in  the  cities  were  not  only  for    ^uyer  and 
business  but  for  pleasure.     When  trade  rela- 
tions were  established  between  the  jobber  and  the  re- 


136  MERCANTILE  CREDIT 

tailer,  the  personal  relations  between  them  became  of 
such  a  character  that  the  retailer  usually  purchased  ex- 
clusively of  the  jobber.  The  standards  of  business  and 
personal  honor  then  demanded  fairness  in  prices  and  in 
quality  of  goods  on  the  part  of  the  jobber,  and  prompt- 
ness in  paying  his  debts  as  contracted  on  the  part  of 
the  retailer.  An  element  of  shrewdness  and  a  power 
of  personal  control  were  acquired  by  the  city  merchant 
in  those  days  which  the  changed  methods  of  buying  and 
selling  have  made  unnecessary  now. 

Nearly  all  the  states  and  territories  had  insolvency 

and  collection  laws,  but  they  were  rarely  enforced,  as 

eastern  merchants  seldom  attempted  to  pros- 

Insol-  ecute    bankrupts    in   the   West   and   South. 

vency  and    jy[any  merchants,  even  as  late  as  the  '40's, 

collection  .  .  .. 

laws  of         claimed  that  it  would  be  better  it   all  the 

states.  collection  laws  of  the  states  and  territories 

were  abolished,  as  higher  standards  of  honesty 

and  honor  would  be  developed  without  them. 

These  earlier  notions  gradually  changed.     The  jobber 

had  but  little  definite  information  as  to  the  standing  of 

_  those  to  whom   he  granted   credit,   and  he 

Failure  of  . 

early  frequently  discovered  that  his  confidence  had 

methods        been  misplaced.     Especially  during  times  of 

of  granting    panjcs  an(j  depressions,    he  lost   heavily   by 

injudiciously  granting   credit.     Some  of  the 

larger  jobbing  houses  that  could  afford  to  do  so  sent  out 

agents  among  their  customers  to  make  collections  and 

to  investigate  their  standing  and  the  character  of  their 

buiness.     The  means  of  travel  were  slow  and  difficult, 


SOURCES  OF  CREDIT  INFORMATION    137 

and  this  method  of  learning  the  status  of  those  seeking 
credit  proved  to  be  very  expensive.  At  least  all  the  small 
jobbing  houses  were  denied  this  means  of  investigation. 
Such  credit  relations  prevailed  exclusively  among  busi- 
ness men  to  the  close  of  the  crisis  of  1837.  After  the 
crisis  had  spent  its  force,  and  thousands  of  merchants  had 
been  retired  from  business,  the  granting  of  credit  with 
little  or  no  knowledge  of  the  standing  of  those  seeking 
it  became  a  very  serious  problem  to  both  the  jobber  and 
manufacturer.  Then,  too,  as  business  relations  began 
to  extend  over  a  larger  area,  a  greater  need  was  felt  for 
information  concerning  the  business  standing  of  men 
continually  seeking  credit,  which  could  be  procured 
nowhere  but  in  the  home  of  the  merchant.  It  was  at 
this  time  and  under  such  conditions  that  the  mercantile 
agency  arose. 

The  rise  of  the  mercantile  credit  agency  may  be  traced 
to  the  eagerness  with  which  information  kept  by  the  credit 
man  of  a  large  jobbing  house  of  New  York 
was  sought  for  by  sellers.     The  credit  man    yrsamza- 
recorded  in  a  book  all  the  information  he    agencies. 
could  collect  over  a  series  of  years  concerning 
the  traders  with  the  house.     The  house  failed,  but  the 
information    was    preserved.      Other    houses   knowing 
this  sought  out  the  credit  man   to   get   his  informa- 
tion.    He  began  to  sell  it,  and  in  this  act  of   his  we 
have  the  origin  of  the  first  mercantile  agency.      Tap- 
pan  &  Co.  was  organized  in  1841.     In  1846  Benjamin 
Douglas  was  admitted  to  the  company  as  a  partner  of 
Tappan.     In  1854  Graham  Dun  became  a  partner  of 


138  MERCANTILE  CREDIT 

Douglas  and  the  firm  name  was  Douglas  &  Company. 
In  18G0  Douglas  withdrew,  and  since  then  the  business 
has  been  conducted  under  the  name  of  R.  G.  Dun  &  Co. 
The  Bradstreet  Company,  the  other  leading  agency,  was 
organized  in  1849.  Mr.  John  M.  Bradstreet,  a  lawyer 
of  Cincinnati,  had  charge  of  a  large  insolvent  estate  and 
learned  by  this  means  a  great  deal  of  credit  information 
concerning  people  in  and  near  Cincinnati.  He  made 
arrangements  with  several  New  York  houses  which  en- 
abled him  to  sell  his  credit  information  to  them.  This 
led  him  to  organize  an  institution  which  dealt  exclusively 
in  credit  information.  He  was  soon  joined  in  the  busi- 
ness by  his  son,  and  the  name  was  changed.  The  more 
recent  change  of  title  was  in  1876,  when  the  firm  was  in- 
corporated as  the  "  Bradstreet  Company."  Other  general 
agencies  for  a  time  attempted  to  compete  with  the  Brad- 
street and  Dun  companies,  but  they  failed,  and  now  these 
two  companies  have  practically  a  monopoly  of  the  gen- 
eral agency  business. 

The  agency  was  organized  at  first  primarily  in  the 

interest  of  the  jobber.     Customers  from  different  states 

and  territories  came  to  him  seeking  credit. 

Develop-  There  was  great  need  for  information  on  the 
ment  of  . 

agencies,  changing  conditions  of  the  dealers.  As  job- 
bing houses  were  established  in  western  centers, 
branch  offices  were  opened  to  collect  and  disseminate 
information.  By  1850,  besides  the  offices  at  New  York, 
Boston,  and  Baltimore,  western  offices  had  been  estab- 
lished at  Cincinnati,  Louisville,  and  St.  Louis.  By  1857, 
seventeen  offices,  besides  the  central  one  in  New  York,  had 


SOURCES  OF  CREDIT  INFORMATION    139 

opened  in  trading  centers.  Each  office  was  supported 
by  the  trading  community  of  which  it  was  the  center. 
The  office  in  Boston  had  charge  of  the  trading  community 
of  New  England,  the  one  in  Charleston  the  community 
of  South  Carolina  and  Georgia,  while  the  Ohio  Valley 
was  divided  between  the  offices  at  Pittsburg,  Cincinnati, 
and  Louisville.  All  the  branch  offices  were  under  the 
control  of  the  central  office  in  New  York,  and  they  were 
all  governed  by  uniform  rules. 

It  could  not  be  expected  that  an  institution  which 
encroached  upon  the  personal  rights  of  the  individual 
and  pried  into  the  business  affairs  of  merchants  would  de- 
velop without  opposition.  It  met  with  bitter  opposi- 
tion by  retailers,  and  at  first  it  was  not  generally  en- 
dorsed by  jobbers.  While  many  of  the  jobbers  accepted 
it  at  once  as  valuable  to  them  and  supported  it,  others 
looked  upon  it  as  an  unnecessary  institution,  and  some 
agreed  with  retailers  that  it  was  contrary  to  the  spirit 
of  free  institutions.  At  first  reports  had  to  be  based 
upon  hearsay  evidence  in  communities  and  upon  records 
of  deeds  and  mortgages.  Only  in  exceptional  cases 
could  the  merchant  be  induced  to  give  his  standing. 
This  prejudice  against  the  agency  has  been  bitter  to 
within  the  last  generation.  Only  within  the  last  twenty 
years  has  the  agency  been  conceded  the  right  to  require 
a  signed  statement.  Even  now  the  signed  statement 
is  repeatedly  refused;  but  merchants  generally  feel  that 
it  is  to  their  interests  to  comply  with  the  requests  of  the 
agencies  in  giving  statements  over  their  own  signature. 
A  right  has  been  established  here  by  private  companies 


140  MERCANTILE  CREDIT 

to  inquire  into  the  business  affairs  of  individuals,  a  con- 
dition which  has  been  impossible  in  foreign  countries. 
In  no  country  other  than  the  United  States  do  the 
mercantile  agencies  go  so  far  in  investigations  of  private 
business.  Elsewhere  the  rights  of  an  inquisitorial  char- 
acter have  been  monopolized  chiefly  by  the  state. 

An  investigation  of  certain  business  conditions  in  the 
United  States  and  abroad  will  reveal  the  causes  of  the 
difference.  In  older  countries  business  relations  are 
more  fixed;  they  move  in  more  definite  channels,  and  are 
better  understood.  Private  agencies  exist  in  other  coun- 
tries, but  their  information  on  the  credit  worth  of  appli- 
cants for  credit  is  not  as  complete  as  in  the  United 
States. 

In  Germany  a  credit  reform  association  was  organized 
in  1882  by  manufacturers,  merchants,  bankers,  and  other 
business  men,  for  the  purpose  of  distributing  confidential 
information  regarding  the  standing  of  firms  seeking 
credit,  and  of  collecting  delinquent  debts.  The  informa- 
tion procured  and  disseminated,  however,  was  based  on 
the  records  of  business  men  in  their  dealings  with  one 
another,  and  on  what  could  be  learned  in  a  general  way  as 
to  their  financial  standing.  This  association,  though  still 
in  existence,  is  not  highly  efficient,  because  the  oppor- 
tunity of  procuring  statements  from  merchants  over  their 
own  signature  is  denied  it.  Even  the  right  to  investi- 
gate their  standing  from  government  records  is  re- 
stricted. In  the  United  States,  on  the  other  hand, 
records  have  always  been  open  to  the  inspection  of  the 
public  within  reasonable  limits. 


SOURCES  OF  CREDIT  INFORMATION    141 

The  mercantile  agency  here  grew  out  of  our  credit 
system  under  the  peculiar  conditions  of  the  rapid  exten- 
sion of  commerce  in  a  new  country.     Com- 
mercial   centers    were    springing    up    in    the     Why  con" 
newly  settled  parts  of  the  south  and  west,    America 
and  new  customers  were  continually  appearing    were 
in  eastern  houses  and  asking  for  credit.     Busi-    favorable 
ness  firms  in  the  early  days  had  but  a  transient     °r  grow 
existence.     Attachments     to     a     community    agencies, 
had  but  little  force,  and  migration  to  loca- 
tions where  more  enticing  opportunities  were  presented, 
was  frequent.     Business,  too,  was  much  more  specula- 
tive in  its  nature  then  than  now.     While  great  successes 
are  not  infrequent  in  new  countries,  the  business  death 
rate,  too,  is  high.     In  older  countries  business  connections 
are  more  fixed,  and  business  methods  assume  a  more 
conservative  tone.     The  same  firm  name  often  prevails 
in    a    community   for   generations,  and   the   character 
of  the   business   is  analogous   to   that   of    Tennyson's 
"Brook."     While    great  successes  are  very  infrequent 
and  almost  impossible,  the  business  death-rate  compared 
with  new  countries   is  low.     With  the  constantly  shift- 
ing changes  in  mercantile  life  in  America  in  early  days 
credit   was   freely   extended.     Under   these   conditions 
debtors  are  more  inclined  to  permit  inquiries  regarding 
their  business  standing.     The  two  periods  which  com- 
pletely unsettled  business  relations  were  most  responsible 
for  the  origin  and  growth  of  mercantile  agencies.     The 
origin  of  the  institution  is  traced  to  the  endeavor  to  re- 
store commercial  order  from  the  bankrupt  institutions 


142  MERCANTILE  CREDIT 

left  in  the  wake  of  the  crisis  of  1837,  and  the  period 
of  its  greatest  prosperity  followed  the  unsettled  busi- 
ness relations  created  by  the  Civil  War.  It  is  at  such 
times  that  the  business  houses  appreciate  most  the 
need  of  such  information  as  can  be  given  by  organized 
agencies. 

Retailers  finally  saw  many  of  the  advantages  which  the 
agency  conferred.  While  the  close  personal  relations 
between  themselves  and  the  city  merchants 
..  gradually  disappeared,  this  loss  was  compen- 

sated for  in  other  ways.  As  soon  as  the 
agencies  published  the  standing  of  business  men,  it  was 
unnecessary  for  them  to  confine  their  city  trade  to  one 
or  a  few  merchants.  They  took  advantage  of  the  com- 
petitive principle  and  purchased  where  the  best  bar- 
gains were  to  be  had.  When  they  became  subscribers 
to  the  agency,  they  learned  what  merchants  in  the 
city  had  the  best  rating,  and  this  influenced  them  in 
buying. 

In  local  communities  the  merchant  grants  credit  to 
those  only  in  whose  intention  and  ability  to  pay  he  has 
confidence.  Before  credit  is  given,  a  personal  knowl- 
edge of  the  man  is  necessary.  Bankers  likewise  acquire 
a  personal  knowlcedge  of  men  before  credit  is  given. 
With  the  jobber  and  manufacturer  the  case  is  different. 
Their  customers  are  distributed  over  a  wide  area,  they 
come  in  contact  with  them  only  occasionally,  and  con- 
sequently their  facilities  for  knowing  customers  are 
more  meager  than  those  at  the  command  of  the  banker 
and  retailer. 


SOURCES  OF  CREDIT  INFORMATION    143 

To  the  jobber  and  manufacturer  the  service  of  the 
agency  was  seen  to  be  invaluable  so  long  as  the  reports 
were  accurate.     The  larger  houses  which  sent    value  to 
agents  to  investigate  the  standing  of  their    manufac- 
customers,  found  that  the  system  provided    *urer  and 
by  the  mercantile  agency  permitted  them  to    3° 
secure   their    information    more    cheaply.     They   were 
notified   as  to  who   the  reliable   merchants  were,  and 
were  warned  against  men  without  business  standing  and 
of  bad  financial  habits.     A  merchant  who  found  himself 
unable  to  pay  his  debts  frequently  moved  to  a  com- 
munity where  he  was  unknown,  secured  credit,  if  pos- 
sible, and  began  again.     In  keeping  careful  records  the 
agency  traced  these  men  from  state  to  state,  creditors 
were  notified,  and  either  settlements  were  effected  or 
credit  was  refused. 

The  honest  merchant  derives  an  advantage  when  the 
agency  makes  it  impossible  for  the  unworthy  to  receive 
credit,  as  he  is  freed  from  competition  with  undesir- 
able competitors.  The  competition  of  the  business 
pirate  and  of  the  incapable  is  dreaded  by  honest  mer- 
chants. Those  who  purchase  without  paying  for  what 
they  buy  are  most  indifferent  as  to  selling  prices,  and  the 
competition  of  such  men  makes  deep  inroads  into  the 
trade  of  other  merchants.  The  same  can  be  said  with 
equal  certainty  of  the  merchants  without  business  ca- 
pacity, whose  chief  aim  is  to  have  a  large  trade  regardless 
of  selling  prices,  and  who  sooner  or  later  must  go  down 
in  the  competitive  commercial  battle.  Through  the 
continued  inspection  and  observation  of  the  work  of 


144  MERCANTILE  CREDIT 

business  men,  a  force  is  exerted  which  lifts  the  methods 
and  ideals  of  business  to  a  higher  plane.  Favorable 
reports  are  responsible  for  credit,  and  to  credit  is  fre- 
quently due  business  success.  The  agency  contributes 
one  of  its  chief  services  in  working  out  a  selective  proc- 
ess by  which  the  weaker  members  of  the  mercantile 
community  are  eliminated,  and  the  most  capable  are 
permitted  to  survive. 

One  of  the  rights  acquired  by  the  mercantile  agency 

is  to  demand  a  signed  statement  of  the  merchant.     This 

demand  is  by  no  means  universally  complied 

with,  but  is  gradually  growing  so  that  mer- 
statement.  '  .      . 

chants  are  beginning  to  feel  that  a  difference 

is  made  in  their  standing  when  they  refuse  to  give  it. 
It  possesses  a  legal  status,  since  false  statements  make 
the  individual  criminally  liable  for  obtaining  goods  under 
false  pretenses.  On  this  account  it  is  considered  valu- 
able to  the  granter  of  credit,  and  is  given  with  care  by 
the  merchant.  Individual  reports  have  been  given  all 
along  when  requested,  and  one  of  the  chief  services  of 
the  agency  consists  in  doing  this. 

Organization. 

The  agencies  are  organized  under  the  control  of  cen- 
tral offices  in  New  York.     The  country  is  divided  into 
districts,  and  in  each  district  is  an  office  to  be 

Orgamza-    SUpported  by  the  district  and  to  have  charge 

tion  of  the 

agencies.      °^   the   collection   and   the   dissemination   of 

information  within  the  district.     The  R.  G. 

Dun  Co.  has  223  such  districts.     In  each  district  there 


SOURCES  OF  CREDIT  INFORMATION    145 

are  usually  many  counties.     The  company  has  three 

classes  of  investigators:  (1)  the  traveling  reporters,  who 

visit  every  locality  at  least  twice  a  year,  and  (2)  the 

local  reporter,  who  usually  resides  in  the  county  seat,  and 

(3)  an  attorney,  who  also  resides  in  the  county  seat. 

Both  the  traveling  reporter  and  the  local  reporter  serve 

an  apprenticeship  in  the  district  office  before  they  are 

employed  as  reporters.     The  attorney  who  is  employed 

as  reporter  as  a  rule  gives  only  a  portion  of  his  time  to 

the  work  and  makes  emergency  reports  or  reports  of 

developments  which  the  district  office  needs  to  know  at 

once.     He  is  also  the  advisory  agent  of  both  the  traveling 

reporter  and  the  local  reporter. 

In  some  cases  the  work  is  divided  into  the  difficult  and 

the  less  difficult  tasks  and  the  more  experienced  men  are 

put  on  the  hardest  problems.     In  the  larger 

cities  the  work  is  classified  with  respect  to    sPecia"~ 

zation  in 
kinds   of   business,    and   reporters   specialize    work. 

on  classes  of  work.  There  is  a  great  advan- 
tage in  this  because  where  there  are  many  lines  of  busi- 
ness a  reporter  is  put  on  each  line;  as  a  result  he  be- 
comes an  expert  in  reporting  on  his  particular  class  of 
business  and  his  services  are  continued  in  that  field  for 
years. 

Each  district  office  often  has  a  number  of  sub-offices 
in  its  territory.     The  number  of  sub-offices  depends  upon 
the  size  of  the  district  and  other  conditions.        Sub- 
From  these  sub-offices  reporters  are  sent  out        offices, 
over  the  territory  of  the  sub-office  to  make  investigations 
and  reports. 


146  MERCANTILE  CREDIT 

Each  of  the  two  leading  agencies  has  foreign  offices  in 
every  civilized  country.  The  number  of  these  offices 
0  .  depends  on  the  size  of  the  country  and  the 
tion  of  importance  of  its  trade  to  the  United  States- 
foreign         The  R.  G.  Dun  Company  has  four  offices  in 

ft  ifl  fQC 

Mexico  and  one  in  all  the  leading  cities  of 
Europe.  From  these  offices  traveling  reporters  are  sent 
out  to  collect  trade  information.  While  the  office  is 
managed  by  an  American  the  traveling  reporters  are 
almost  invariably  natives  of  the  countries  where  the  offices 
are  situated.  The  reports  obtained  abroad  are  not  as 
complete  as  the  reports  secured  from  business  men  in  the 
United  States,  nor  is  there  any  great  degree  of  uniformity 
of  reports  of  the  different  countries.  The  managements  of 
foreign  offices  in  each  country  study  the  habits,  methods, 
and  policies  of  business  men  especially  with  reference  to 
credit  and  there  obtain  such  information  as  will  make 
their  reports  conform  as  nearly  as  possible  to  the  Ameri- 
can reports.  The  information  collected  at  the  foreign 
offices  is  primarily  for  the  benefit  of  American  exporters 
who  are  subscribers  to  the  agency.  Foreign  business 
men,  however,  make  some  use  of  the  special  reports  ob- 
tained by  the  foreign  offices. 

In  the  New  York  office  are  assembled  all  the  reports 

made  out  both  at  home  and  abroad  for  both  the  Dun  and 

Bradstreet  agencies.     The  Chicago  office  is  to 

Clearing       a  jegg  ex^en-t   a  clearing    house   for   reports. 

house 

offices.         ^n  *ne  Chicago  office  are  collected  all  reports 

made  out  in  the  western  part  of  the  United 

States,  Alaska  and  Mexico.     There  is  an  advantage  in 


SOURCES  OF  CREDIT  INFORMATION    147 

having  territorial  clearing  houses  as  any  one  in  a  given 
district  desiring  reports  from  other  sections  of  the  district 
can  obtain  them  sooner  than  if  he  had  to  send  to  New 
York  for  them.  For  instance  with  the  present  plan  a 
merchant  in  Minnesota  desiring  reports  from  New  Mexico 
can  send  to  Chicago  for  copies  of  them.  Copies  of  reports 
are  always  made  out,  and  any  office  can  obtain  reports 
from  any  district  where  its  subscribers  are  interested. 
The  Columbus  office  obtains  reports  from  every  county 
in  Ohiq  outside  of  the  counties  where  Cleveland  and  Cin- 
cinnati are  situated,  because  its  patrons  are  interested  in 
reports  from  every  county  in  the  state  outside  of  these 
two  cities. 

Information  is  secured  directly  from  merchants  and 
manufacturers,  and  they  are  asked  to  make  a  signed 
statement  giving  the  status  of  their  business, 
containing  assets,  liabilities,  capital  stock,  in-      - 
cumbrances   on   property,  etc.     Form    VI   is    securing 
the  property  statement  form  for  corporations;    credit 
Form  VII  is  the  property  statement  form  for    * 
individuals  and  partnerships,  used  by  the  R.  G. 
Dun  Co.     The  differences  in  the  questionaires  of  the  two 
forms  are  due  to  the  differences  in  organization  and  in 
responsibility   of   the   two   types   of   concerns.     If   the 
person  should  refuse  to  make  a  signed  statement  the 
information  is   reported  orally.      If  he  refuses  to  give 
any  information  at  all,  the  investigator  finds  out  what  he 
can  from  public  records  and  from  people  in  the  com- 
munity.    Whether  a  signed  property  statement  is  made  or 
not  the  public  records  are  always  investigated  to  learn  if 


148  MERCANTILE  CREDIT 


Statement  as  a   Basis  for  Credit 

MAL>B     TO 

R.  G.  DUN    &   CO. 

Location County  of Stmte  of 


From  Inventory  ot- 


Daie   of   tnrfirp^ratinn                                                                        .       ...  Under    Laws  of_ 
Authorized  Capital  Stock.  $ No   of  Shares P 


Amount  of  Stock  subscribed,  $ Paid  in,  IN  CASH. 

Amount  paid  in  otherwise  than  in  cash  and   how.  $ 


Limit  of  indebtedness  allowed.  $. 


Bonded  Debt,  $ Drawing  interest  at. 

Whom  does  the  Corporation  succeed  ? 


President. 


Vice- President, 

Secretary, 

Treasurer, 


Superintendent  or  General   Manager 

DIRBCTORS. 


FORM  VI. 


SOURCES  OF  CREDIT  INFORMATION    149 


a.  »  emt. 

Real  Etutt  and  bnttdingv •$- 

Machinery  and  plinx     . 

Stock  oo  hand  rav  and  finished. •        .        . 

Bill*  receivable,  at  realizable  value.        .         • 

Accounts  receivable,  considered  good.   »•»•••••* 

Cash  on  hand  and  in  bank ..,•... 

Ail  other  assets,  exclusive  of  patent  rights. 

Total  Assets, &- 

LIABILITIES. 

For  merchandise,  open  account       .         •         •         ...       S  , 

Bills  payable, 

For  machinery.        •...•••»•         — ■ 

Mortgages  on  real  estate,        •»••..«  . 

Debts  secured  by  mortgage  (or  lien)  on  personality.      .         .          __ ______ 

For  borrowed   money,  unsecured,    ...•••  , 

All  other  liabilities,  contingent  and  otherwise,        .         .         .  . 

Total. Liabilities  .         , $_ 

Amount  of  Assets  over  Liabilities,      .....•••       $_ 
INSURANCE    ON    MERCHANDISE,    $ 


ON    BUILDINGS.    MACHINERY    AND    PLANT    $_ 
Yearly  extent  of  business,  8 


Bank  and  other  References:. 


ADDITIONAL     REMAR1 


FORM   VI.— (Continued.) 


150  MERCANTILE  CREDIT 

Statement  as  a  Basis  for  Credit 

NADC    TO 

R.  G-  DUN  &  CO. 


Of  the  Financial  Condition  of 

Location County  of State  of. 

Front  Inventory  of 190 Business 

Dated 190 


ASSBTS. 

Merchandise  on  hand  and  in  transit $. 

Outstandings,  including  bills  receivable,  open  accounts,  etc     at  realizable  value,         .  _ 

Cash  on  hand  arjd  in  bank, 

Other  TERSONAL  assets,  consisting  '•< 


Total  available  assets ..-..,  $. 

LIADII.ITIE8. 

For  merchandise  not  due,  •         4        •        *         .         .         »        $ . 

For  merchandise  past  due,'        «        »         #         •         »         t         •  — 

Loans  from  bank,       ,,,<••,,,  . 

Loans  other  than  from  bank.      ,...,..  . 

Other  obligations,       ,,,,..,...  . 

Total  liabilities.        , f-. 

Surplus  In  business,  ,        .        .        , 

RF.AL  ESTATE:     Describe,  locate,  and  value  separately,  and  in  whost  ntimt  held 


Total  value  of  real  estate,        ' & 

Mortgages  or  amount  unpaid  thereon,         •        a         i         ,         •  ________ 

Equity  in  real  estate,  .        .        ,        .        , $_ 

Total  worth,  in  and  out  of  business,          ...,',,. 
Insurance -on  stock,  %  On  rtal  estate,  $ 


Annual  business  amounts  to  $  Amooot  of  legal  exemptions.  $  , 

Amount  of  chattel  mortgages  or  judgments,  % 
Individual  obligations  of  each  partner. 


Ever  burned  nut  ?     If  so,  state  circum-rtances  of  fire, 
Give  full  name  of  all  the  partners,  ________ 


ftlfltlKr*  IgUMO*  wt  6*V 


FORM  VII. 


SOURCES  OF  CREDIT  INFORMATION    151 

there  are  mortgages  or  other  encumbrances  on  the 
property.  The  agency  also  learns  what  it  can  of  the 
habits  and  managing  ability  of  the  manager  of  the  busi- 
ness. It  finds  out  whether  he  attends  to  business,  what 
his  reputation  for  integrity  and  promptness  is,  and 
whether  or  not  he  speculates  outside  of  his  business. 
Whenever  any  suits  are  brought  against  him  or  when 
a  mortgage  on  his  property  is  given,  or  when  losses  are 
sustained  by  fire,  these  facts  are  immediately  reported 
by  the  local  agent  to  the  branch  office,  and  the  creditors 
of  the  merchant  are  notified.  Regular  reports  are  made 
twice  a  year. 

All  the  information  gathered  is  classified  and  filed 
in  card  cabinets  with  reference  to  counties  and  cities, 
the   names   of   the   firms   represented    being    ciassifv- 
arranged    alphabetically    with    reference    to    ing  and 

cities.     Whenever    an    inquiry    is    made    re-    filing  in- 

,.  n         ,1  i_         j.  ,i  .         •       formation, 

gardmg  a  firm  the  number  of  the  inquirer  is 

placed  on  the  firm  card.     If  changes  take  place  in  th' 

status  of  the  firm,  the  inquirer  can  be  informed  at  onct 

The  information  is  distributed  to  the  trade  through 

the    quarterly    reference    books    and    special    reports. 

Suscribers  pay  $100  a  year  for  the  quarterlies, 

and  for  a  certain  number  of  special  reports.    ^istn°y" 

.  tion  of  m- 

When  all  the  regular  reports  are  received  and    formation. 

many  of  the  special  reports,  the  rates  are 
much  greater.     Some  of  the  subscribers  to  the  two  lead- 
ing companies  pay  as  high  as  $30,000  annually  for  the 
services  rendered.     Each  subscriber  is  invited  to  submit 
a  list  of  his  customers  in  which  he  is  interested.     Some 


152  MERCANTILE  CREDIT 

submit  names  of  all  their  customers,  while  others  give 
no  report  at  all.  However,  the  names  submitted  in- 
clude nearly  all  concerning  whom  subscribers  desire 
specific  reports.  When  a  special  report  is  desired,  the 
information  is  usually  wanted  immediately  by  the  sub- 
scriber. The  information  at  hand  is  collected,  and,  as 
a  rule,  it  is  reported  within  a  day.  If  there  has  been 
an  important  change  in  the  work  of  the  concern,  so  that 
an  investigator  must  visit  the  manufacturer  or  merchant, 
sometimes  several  days  are  required  to  make  the  report. 
In  the  quarterly  reference  books  furnished  the  sub- 
scribers by  the  two  agencies,  business  concerns  are  classi- 
fied   with   reference    to  their   capital   rating 

Quarterly     an(j  crec^  rating.     Signs  are  used  to  indicate 

reference 

books.  *ne   ratings.     Nearly   20   signs   are   used   to 

indicate  financial  ability  and  about  10  to 
indicate  credit  standing.  Many  factors  enter  into  the 
rating  assigned  a  business  man  besides  his  financial  re- 
sponsibility. His  promptness  in  paying,  his  business 
ability,  his  personal  habits  including  his  inclination  to 
speculate  outside  of  his  business,  his  refusal  to  furnish  a 
report  to  the  investigators,  etc.,  are  all  factors  which  must 
be  taken  into  account  in  assigning  him  a  rating.  In  these 
signs  which  designate  credit  ratings  is  condensed  a  great 
deal  of  information.  They  are  used  for  purposes  of  con- 
venience to  subscribers  to  enable  them  to  read  at  a  glance 
the  credit  rating  of  those  in  whom  they  are  interested. 
Then,  too,  without  such  a  condensation  of  information  the 
quarterly  reference  books  would  be  too  bulky  to  be  usable. 
Until  about  five  years  ago  the  agencies  issued  daily 


SOURCES  OF  CREDIT  INFORMATION    153 

sheets  or  reports  to  supplement  the  quarterly  reference 
books.     To  take  their  place  greater  use  is  made  of  the 
special  reports.     The  daily  trade  reports  be-      Discon- 
came  bulky  and  inconvenient  to  use.     When      tinuance 
first   issued  they  were  intended   to    convey      of  daily 
confidential  information  to  subscribers,    but      rePor  s- 
instead  of  being  so  treated  they  fell  into  the  hands  of 
collectors  and  collecting  agencies  and  were  used  by  them 
with  great  regularity  in  furthering  the  interests  of  their 
business  in  preying  on  those  whose  credit  standing  was 
not  strong.     To  protect  the  trader  from  the  irresponsible 
collector  and  to  guarantee  that  the  information  furnished 
should  be  used  only  by  those  for  whom  it  was  intended, 
the  agencies  abandoned  issuing  the  daily  reports  and  gave 
more  attention  to  the  preparation  of  special  reports 
which  were  sent  to  subscribers.     Credit  men  who  at 
first  objected  to  the  discontinuance  of  the  daily  reports 
now  find  the  special  reports  more  satisfactory  to  them. 
An  exceedingly  valuable  service  is  rendered  by  the 
two   agencies,    through   their   magazines,    in   reporting 
business    conditions.     These   weekly   reports      Maea- 
furnish  far  more  valuable  and  reliable  infor-      zines  of 
mation  on  the  status  of  business  conditions,      the 
of    trade    and    market    conditions    in    every     agencies« 
section   of   the   country,  than  any  publication  dealing 
with  similar  subjects.     With  agents  in  every  section  of 
the  United  States,  and  even  in  foreign  countries,  the 
agencies  occupy  a  strategic  position  for  collecting  and 
making  public  reliable  information  which  enables  busi- 
ness men  to  adjust  their  plans  in  conformity  to  changes 


154  MERCANTILE  CREDIT 

continually  taking  place  in  the  business  world.  The 
fact  that  this  is  only  an  incidental  feature  of  their  busi- 
ness in  no  way  lessens  their  value. 

Utility  of  the  Agencies 

Recently  there  has  been  a  great  deal  of  criticism  of  the 
mercantile  agencies  by  credit  men  and  organizations  of 
credit  men.  The  formation  of  credit  men's  associations 
and  exchange  information  bureaus,  and  the  efforts  of  in- 
dividual credit  men  to  gather  a  class  of  information 
concerning  solicitors  of  credit  which  is  not  furnished  by 
the  agencies,  are  evidences  of  the  shortcomings  of  the 
mercantile  agencies  from  the  point  of  view  of  the  credit 
man.  Mr.  Prendergast  in  his  work  "Credit  and  Its 
Uses"  claims  that  "there  is  a  distinct  feeling  that  while 
the  mercantile  agency  service  is  valuable,  it  is  not  in- 
dispensable. Many  of  them  have  come  to  the  opinion 
now  that  this  class  of  information  is  only  secondary." 
However,  after  several  years  of  experience  with  credit 
exchange  bureaus  the  complaint  is  made  that  some  of 
the  members  of  the  bureaus  rely  exclusively  on  the  bureau 
for  credit  information  instead  of  subscribing  to  mer- 
cantile agencies  and  having  the  two  sources  of  infor- 
mation supplement  each  other. 

The  criticism  of  the  agencies  by  credit  men  has  led  to 
a  great  improvement  of  their  service  in  the  last  twelve 
Improve-  or  fifteen  years.  The  National  Association 
ment  of  of  Credit  Men  has  a  standing  committee  on 
service  of  mercantile  agencies,  and  many  of  the  local 
agencies,      associations  of  credit  men  have  such  a  com- 


SOURCES  OF  CREDIT  INFORMATION    155 

mittee.  These  committees  have  cooperated  with  the  mer- 
cantile agencies,  the  service  of  the  latter  has  been  im- 
proved, and  a  better  understanding  prevails  between  the 
mercantile  agencies  and  credit  men  as  a  result  of  their 
cooperation. 

The  chief  criticisms  of  the  mercantile  agencies  are 
the  following: 

1.  Reports  of  agencies  are  sometimes  misleading  since 
the  failures  of  those  who  have  a  good  standing  with  Dun 
and  Bradstreet  sometimes  occur. 

2.  Special  reports  furnished  are  unsatisfactory  on 
account  of  the  delay  in  securing  them. 

3.  They  fail  to  furnish  ledger  information. 

4.  The  reports  are  lacking  in  system  and  definiteness. 

5.  The  reports  lack  in  comprehensiveness,  in  detail, 
and  in  attention  to  essential  elements. 

Credit  men  and  the  agencies  themselves  are  better 

informed  as  to  the  validity  of  these  criticisms  than  the 

writer.     A  few  observations,   however,   may 

be  made  with  safety.     Where  several  hun-         y . 

mistakes 
dred   thousand   reports   are   made   annually,    are  ma(je# 

covering  all  business  conditions  and  every 
section  of  the  country,  it  is  to  be  expected  that  some 
errors  will  be  made,  and  that  some  Houses  will  be  de- 
clared to  be  in  good  standing  which  go  into  the  bank- 
ruptcy court.  When  judged  by  this  standard  alone  the 
percentage  of  such  errors  determines  the  efficiency  of 
the  agency. 

That  the  agency  is  slow  with  its  reports  is  only  partly 
true.     Much   depends  on  the   nature  of  the  informa- 


156  MERCANTILE  CREDIT 

tion  desired  and  the  difficulty  of  obtaining  it.     No  rules 

can  be  given  specifying  the  time  required  for  such  a 

report.     If  the  agency  has  all  the  informa- 
Aire 
o^o^rSoe       ti°n  desired  at  hand  the  report  can  be  fur- 

slow  in         nished  the  same  day  that  it  is  requested.     If 

making        tne  information  must  be  procured  after  the 

.  .,       request  for  it  is  received  it  will  take  one  or 
reports?  ^ 

several  days  to  make  out  the  report — the  time 
depending  upon  the  difficulty  of  securing  the  desired 
information. 

The  agencies  have  failed  to  furnish  ledger  information 
and  they  claim  that  it  is  impossible  for  them  to  devise 
a   system   to    exchange    ledger    information, 
cannot  ^  ^as  ^een  suggested  that  the  agencies  fur- 

furnish        nish  reports  free  to  all  who  furnish  the  agency 
ledger  ledger  information.     Both  agencies  refuse  to 

in  orma-      ^Q  ^ajS}  claiming  that  as  they  are   private 
money  making  concerns  it  would  be  impos- 
sible for  them  to  adopt  this  policy  without  eliminating 
in  a  measure  the  source  of  their  profits. 

The  criticism  that  the  reports  of  the  agencies  are 
lacking  in  uniformity  of  form  and  development  has  un- 
doubtedly   improved    the    character    of    the 
reports.     However,   the   argument   of  credit 
men  that  a  universal  form  of  report  should 
be  adopted  to  facilitate  the  reading  of  reports  by  credit 
men,  does  not  seem  to  be  valid.     Both  agencies  require 
their  reporters  to  follow  a  topical  order  of  development 
in  making  their  reports.     However,  both  agencies  abso- 
lutely refuse  to  adopt  a  uniform  form  of  report,  a  thing 


SOURCES  OF  CREDIT  INFORMATION    157 

which  would  dispense  with  the  need  of  having  the  credit 
men  read  all  of  each  report.  They  claim  that  their  re- 
ports are  made  out  in  such  a  way  as  to  require  the  en- 
tire reading  of  a  report  and  that  it  is  only  by  reading 
everything  that  is  reported  that  the  credit  man  can  have 
an  adequate  idea  of  the  credit  situation  of  the  applicant 
for  credit.  Reporters  are  given  the  greatest  latitude  to 
write  their  reports  in  such  a  way  as  will  give  a  correct 
view  of  the  standing  of  the  business  reported. 

With  reference  to  comprehensiveness,  to  detail,  and 
to  emphasis  on  essential  elements  improvements  are  being 
made  by  the  agencies.  Shortcomings  of  reports  in  these 
respects  are  due  chiefly  to  the  inefficiency  of  reporters. 
Agencies  claim  that  they  are  demanding  higher  stand- 
ards of  efficiency  of  their  reporters  and  that  they  are 
increasing  the  costs  of  their  service  in  making  their 
reports  more  complete. 

The  active  competition  between  the  two  agencies  and 
the  organized  interest  in  them  and  their  criticism  of  them 
by  credit  men  will  greatly  improve  the  service 
of   the   agencies.     The   business   community      X. 
has  depended  on  these  agencies  so  long  that      agencies, 
it  is  not  likely  that  it  can  soon  dispense  with 
their  services.     It  has  become  so  well  adapted  to  them 
that  it  is  more  inclined  to  look  harshly  upon  their  short- 
comings than  justly  on  their  merits.     Their  real  merits 
could  never  be  appreciated  unless  it  were  possible  to 
forego  their  services  for  a  while.     For  only  in  this  way 
could  business  be  made  to  realize  how  much  it  depended 
upon  them. 


CHAPTER  IX 

SOURCES  OF    CREDIT  INFORMATION 

GENERAL  SOURCES 

Salesmen 

Aside  from  the  information  obtained  from  the  mercan- 
tile agency  by  the  credit  department  it  obtains  a  great 
deal  of  information  from  a  variety  of  sources, 
salesmen  ^n  many  respects  the  traveling  salesman 
can  give  occupies,  by  virtue  of  his  work,  a  better  posi- 
important     tion  than  any  one  else  to  obtain  the  kind  of 

,         ..         information  which  a  credit  department  needs. 
formation.  ^ 

He  visits  every  community  where  credit  is 
granted  to  business  men.  He  ought  to  be  able  to  learn 
through  his  relations  not  only  with  the  business  man  seek- 
ing credit,  but  from  others  in  the  community  with  whom 
he  has  relations  of  either  a  casual  or  a  business  character, 
something  of  the  credit  standing  of  those  in  the  com- 
munity in  whom  the  credit  department  of  the  house  is 
interested.  In  selling  to  the  buyer  he  knows  from  his 
experience  with  him  whether  he  is  a  successful  purchaser 
or  not.  From  frequent  visits  to  his  store  he  knows  some- 
thing about  his  stock  of  goods,  the  character  of  his  trade, 
and  the  adaptation  of  his  business  to  his  trade.  Aside 
from  this,  there  are  many  incidental  facts  that  determine 
success  or  failure  with  which  the  salesman  is  familiar. 

158 


SOURCES  OF  CREDIT  INFORMATION    159 

In  the  United  States  the  traveling  salesman  first  ap- 
peared as  a  part  of  our  mercantile  system  primarily  as 
a  credit  man.  Near  the  middle  of  the  nine-  cbaracte, 
teenth  century  when  jobbers  and  manufac-  of  early 
turers  of  the  East  abandoned  the  policy  of  work  of 
selling  almost  exclusively  to  traders  who  vis-  sa  esman* 
ited  their  houses,  and  went  into  the  West  after  trade,  they 
sent  men  into  the  new  communities  primarily  because  they 
were  interested  in  knowing  the  credit  worth  of  those  to 
whom  they  wished  to  sell.  These  salesmen  became  at  the 
very  outset  credit  men  and  collectors  as  well  as  salesmen, 
and  it  was  to  render  the  service  chiefly  as  credit  men  and 
as  collectors  that  they  were  employed  as  salesmen.  With 
the  newer  developments  of  our  mercantile  system  the  work 
of  the  salesmen  and  of  that  of  the  credit  and  collection 
departments  have  been  separated.  Through  specializa- 
tion the  credit  men  and  collectors  have  limited  themselves 
exclusively  to  their  lines  of  work,  while  the  salesmen  have 
become  almost  exclusively  salesmen.  In  recent  years  the 
tendency  is  to  bring  the  salesman  back  into  the  credit 
work  again  because  it  is  believed  that  by  virtue  of  his 
position  he  can  be  of  material  assistance  to  credit  men. 

The  cooperation  of  the  credit  man  and  salesman  is 
not  as  effective  as  successful  business  methods  should 
require.  The  credit  man  should  be  an  adviser  of  the 
traveling  salesman,  while  the  latter  is  in  a  position  to 
provide  the  former  with  invaluable  information.  The 
nature  of  their  work  makes  them  radically  different, 
and  an  altogether  different  type  of  man  is  developed  in 
each  position.     The   salesman's   work   compels  him  to 


1G0  MERCANTILE  CREDIT 

adapt  himself  to  all  classes  of  people.  He  is  sympathetic 
and  responsive,  and  his  feelings  are  easily  aroused  by 
the  woes  of  the  merchant.  His  success  in 
Differ-  selling  goods  depends  upon  his  personal  rela- 
between  tions  with  the  merchant.  He  becomes  ac- 
the  customed  to  their  points  of  view,  and  con- 

salesman  sequently  often  becomes  more  interested  in 
,.  his  customers  than  in  his  employer.      The 

man.  credit  man,  on  the  other  hand,  is  cold,  re- 

served, and  unsympathetic.  He  is  not  easily 
moved  by  the  misfortunes  of  people.  His  judgment  is 
influenced  by  no  motives  other  than  the  financial  suc- 
cess of  his  firm.  The  work  of  the  credit  man  is  to 
make  adjustments.  His  is  the  last  court  of  appeal.  His 
function  is  to  guide  business  into  safe  channels. 

In  the  business  world  the  work  of  these  two  men  has 
been  differentiated,  because  two  very  different  types  are 
demanded  and  consequently  many  believe  that  it  is  a 
great  mistake  to  use  a  salesman  as  a  credit  man  and 
to  withdraw  him  to  a  certain  extent  from  the  line  of  work 
in  which  he  is  efficient  into  a  line  to  which  he  is  little 
adapted.  For  this  reason  many  are  inclined  to  believe 
not  only  that  the  salesman  should  not  do  credit  work, 
but  that  his  credit  reports  are  practically  worthless. 

The  interests  of  the  two  are  in  some  ways  diametrically 
opposed.  The  one  is  anxious  to  secure  as  large  an  amount 
of  sales  as  is  possible,  because  his  salary  is  to  a  certain 
extent  determined  by  sales.  The  other  is  anxious  to 
secure  a  maximum  of  sales  to  reliable  firms,  or  to  put  the 
matter  in  another  way,  a  minimum  of  sales  to  question- 


SOURCES  OF  CREDIT  INFORMATION    161 

able  firms.  In  most  cases  the  credit  man  is  a  stockholder 
in  the  concern,  and  on  this  account  has  an  additional  in- 
terest in  having  as  few  unprofitable  sales  as  possible. 

If  the  services  of  the  salesman  were  so  rewarded  that 
his  total  sales  would  not  influence  his  salary,  he  would  be 
more  serviceable  to  the  credit  man.  In  reporting  the 
character  of  the  business,  the  type  of  the  business  man, 
the  character  of  the  community,  the  industrial  conditions 
upon  which  the  success  of  the  merchant  depends,  etc., 
he  can  give  the  credit  man  facts  that  are  invaluable. 
From  his  broader  survey  of  facts,  and  from  his  experience 
in  watching  credits,  the  credit  man  can  estimate  with  a 
high  degree  of  accuracy  the  probability  of  the  success  of 
the  merchant.  In  going  over  routes  with  salesmen,  the 
credit  man  can  guard  the  salesmen  against  certain 
customers  and  can  direct  them  into  profitable  fields. 
Through  the  supplementary  nature  of  the  work  of  the 
credit  man  and  the  salesman,  and  on  account  of  the 
complementary  qualities  in  the  men,  they  should  be 
mutually  helpful,  and  their  cooperation  should  make 
busines  safe. 

The   salesman   is  sometimes  employed   in  collecting 
debts,  but  in  this  he  is  usually  a  failure.     The  type  of 
man  required  for  selling  goods  is   different 
from  the  type  required  for  collecting  accounts.         esman 
Besides,  there  is  a  direct  economic  loss  in  di-    collector, 
verting,  even  for  a  part  of  the  time,  the  atten- 
tion of  a  man  from  a  field  in  which  he  is  skilled  into  a 
field  for  which  he  is  not  fitted.     The  salesman's  relations 
with  merchants  unfit  him  for  collecting  debts  from  them. 


162  MERCANTILE  CREDIT 

SALESMAN'S  CREDIT  REPORT 

FAIRBANKS,  MORSE  &  CO. 

ST.  LOUIS,  MO. 

(Member  ol  The  National  Association  ol  Credit  Men) 

One  of  these  report*  must  be  filled  out  by  the  salesman  when  taking  older  from  customer  or  customers 
with  whom  we  have  had  no  previous  dealings.  Where  it  is  possible  to  do  so  each  and  every  question  should 
be  answered  fully  and  intelligent!;'.  These  reports  are  for  the  guidance  of  the  Credit  Department  and  when 
properly  filled  out  are  of  material  assistance  in  determining  the  propriety  of  extending  credit.  The  salesman  is 
requeued  to  give  all  information  on  these  forms  and  not  em  ody  it  in  letter  regarding  the  order  as  these  reports 
are  to  be  filed  in  oar  "Credit  Folders." 


Nime- 


Address 
Age 


Business 


How  long  engaged  In  - 
Banks  with 


Oans  real  estate  . 
Incumbrance!  


Stock  valued  at  $- 


Supposed  net  worth.  S- 
Buys  from  ________ 


REMARKS: 


FORM   VIII. 

Report  to  be  filled  out  by  salesmen  when  taking  orders  from  new 

customers. 


SOURCES  OF  CREDIT  INFORMATION    163 
L.  ADLER,  BR05.  &  Co.,  Inc. 

Dear  Sirs:                     In   response  to  your  request  I   submit   the   following   information   concerning 
of 


The  firm  has  been  in  business 
since ... I 


Formerly  were  at- 

or  clerked  for 

of . 


or  (here  state  other  antecedents). 


Lines  of  Merchandise  carried? 

Your  estimate  of  present  value  of  stock  ?  $ 

Do  tbey  do  a  cash  or  credit  business  ? . 

City  or  Country  trade  principally? 


.  Condition  of  stock  ? 


.Amount  of  annual  sales  ?  |_ 


Location  relative  to  business  centre  ? 

Local  opinion  as  to  habits  ? Ability  ?_ 

Is  stock  well  insured?  _ For  how  much?  $ 


.Expenses?- 


.Is  firm  thought  making  money  ?_ 


Is  the  firm,  or  any  member  of  it,  engaged  or  interested  in  other  ventures? _ 

If  so  give  particulars 

Real  Estate  in  own  name,  if  any,  consists  of houses, . vacant  lots, 

stores  and  valued  at  $ „ and  mortgaged  for  $ 

of  this  real  estate  the  following  is  used  as  homestead 

and  valued  at  t   . and  mortgaged  for  $ . . 


If  they  are  just  starting  in  business,  what  capital  has  the  concern  and  in  what  shape?    Cash,  $_ 
other  Assets,  $.. 
Describe  the  other  Assets. 


Buy  principally  from  the  following  houses  (give  address): 
Clothing 


Hats  and  Caps 

Mens'    Furnishings. 


Other  lines ... 


Yours  respectfully. 


SaUmam. 

FORM  IX. 
To  be  used  by  salesmen  when  taking  orders  from  new  customers. 


164  MERCANTILE  CREDIT 

Inquiry  blanks  have  been  devised  to  simplify  and 
make  definite  the  work  of  the  traveling  salesman  in  fur- 
nishing credit  information.     These  blanks  rep- 

Inquiry  resent  extreme  types.  Blank  VIII  is  a  simple 
blanks.  ^  ... 

type  which  calls  for  information  giving  the 

name  of  the  firm,  the  kind  of  business,  the  length  of 
time  the  business  has  run,  the  value  of  stock,  the  en- 
cumbrances on  thep  roperty  and  the  firm's  bank — which 
information  is  to  be  obtained  directly  from  the  seeker 
for  credit.  Aside  from  this  there  is  a  blank  space  for 
information  of  a  more  general  character,  which  the  sales- 
man may  learn  incidentally  from  the  purchaser  and  from 
others  in  the  community.  This  form  has  a  fatal  weak- 
ness in  that  a  report  of  the  insurance  on  the  property 
and  stock  is  not  required;  the  amount  and  kind  of  this 
insurance  are  in  many  respects  the  most  important 
factors  to  be  taken  into  account  by  the  credit  man. 
Otherwise  this  form  can  be  used  to  a  great  advantage, 
and  it  is  difficult  to  see  how  its  use  would  stand  in  the 
way  of  the  success  of  the  traveling  man  as  a  salesman. 
Form  IX,  to  be  used  by  the  salesman,  calls  for  this  in- 
formation and  other  information  of  a  more  detailed 
character.  The  nature  of  some  of  the  information 
sought  in  this  form  is  such  that  many  purchasers  would 
be  unwilling  to  furnish  the  information  to  a  salesman 
who  is  seeking  to  sell  goods,  and  the  salesman  would 
be  very  much  disinclined  to  use  it  on  account  of  the 
danger  of  preventing  a  sale.  Consequently  it  is  be- 
lieved that  a  more  simple  type  of  blank  is  best  for  the 
salesman  to  use,  and  the  credit  men  can  then  depend 


SOURCES  OF  CREDIT  INFORMATION    165 

upon  the  wisdom  of  the  salesman  in  securing  other 
information  of  a  detailed  character  from  others  than 
the  purchaser  himself. 

Attorneys 

From  the  attorney  in  the  community  where  the  busi- 
ness house  makes  sales,  the  credit  man  obtains  impor- 
tant information.  Mr.  Prendergast  in  Credit  Attorneys 
and  Its  Uses  gives  five  reasons  why  an  give 
attorney  is  an  excellent  medium  for  the  credit  in- 
procurement  of  credit  information:  "First,  orma  on" 
the  organization  of  his  office  makes  it  convenient  for 
him  to  act  as  a  collector  and  distributor  of  such  in- 
formation; second,  a  lawyer  invariably  has  a  large  circle 
of  acquaintances,  both  of  a  business  and  social  charac- 
ter, and  this  acquaintance  enables  him  to  secure  infor- 
mation in  regard  to  the  circumstances  of  people  to  better 
advantage  than  others  whose  connections  are  not  so 
extended;  third,  a  lawyer's  duties  afford  him  much  private 
information  in  respect  to  people's  affairs,  a  large  per- 
centage of  which  information  he  is  at  perfect  liberty  to 
utilize  as  credit  material  without  in  any  sense  disclosing 
professional  secrets;  fourth,  his  daily  association  with 
matters  in  litigation  opens  to  him  an  ample  field  of 
information,  a  good  part  of  which  is  hearsay,  but  a 
large  portion  of  which  may  also  have  considerable 
foundation  in  fact,  and  this  information  of  either  class 
can  be  judiciously  diffused  for  credit  purposes;  fifth,  he 
is  frequently  called  upon  to  act  as  a  collector  of  claims 
against  people  or  in  behalf  of  clients  in  cases  where 


166  MERCANTILE  CREDIT 

accounts  are  of  a  disputed  character.  The  information 
he  acquires  through  association  with  this  work  is  of 
vital  interest  to  credit  givers  and  no  better  class  of 
information  could  be  obtained."1 

Attorneys  themselves  have  frequently  volunteered 
to  furnish  credit  information  to  business  houses  because 
of  the  advantages  that  may  accrue  to  them  in 
securing  ^e  way  of  employment  in  case  of  litgiation. 
credit  in-  For  this  reason  they  have  made  out  attorneys 
formation  lists,  which  manufacturing  and  jobbing  houses 
may  use  in  calling  upon  attorneys  to  furnish 
credit  information  in  the  community  where 
they  live.  This  volunteer  service  on  the  part  of  at- 
torneys has,  on  the  whole,  proved  unsatisfactory  not 
only  to  the  attorneys  themselves  but  to  the  houses 
that  use  them  for  credit  information.  The  attorneys 
learned  that  upon  the  whole  they  received  relatively 
little  benefit  for  the  services  which  they  rendered,  and 
in  many  cases  a  great  deal  of  service  is  rendered  in 
furnishing  the  credit  information  for  which  no  returns 
are  received.  Upon  the  other  hand,  business  houses 
complain  of  the  character  of  the  service  rendered  by 
attorneys.  They  claim  that  the  attorneys  prepare 
reports  which  are  superficial  in  character  and  not  based 
upon  facts  which  could  be  easily  procured  upon  in- 
vestigation. When  the  attorney  receives  no  returns 
for  his  services,  it  is  apparent  that  his  services  will 
be  of  an  inferior  character.  To  correct  this,  many  busi- 
ness houses  make  a  practice  of  sending  a  small  fee, 
1  Page  163. 


SOURCES  OF  CREDIT  INFORMATION    167 

usually  one  dollar,  to  the  attorney  along  with  the  credit 
blank  which  he  is  to  fill.  The  fee  furnished  is  intended 
to  pay  the  expense  of  the  service  in  making  the  report. 
In  cases  where  a  more  thorough  investigation  is  desired 
the  business  house  sometimes  pledges  itself  to  make 
further  compensation  commensurate  with  the  services 
rendered  by  the  attorney. 

Since  commercial  work  has  brought  into  existence  a 
class  of  attorneys  who  specialize  in  this  field  almost  ex- 
clusively, many  attorneys  have  developed  offices  which 
should  be,  in  the  very  nature  of  things,  of  great  help 
to  credit  men.  They  have  large  cabinets  where  detailed 
information  is  filed  concerning  the  daily  routine  of  their 
business.  Their  contact  with  the  business  affairs  of  the 
community  is  such  as  enables  them  to  know  more  defi- 
nitely than  any  one  else  in  the  community  the  credit 
standing  of  the  people.  If  he  can  make  this  informa- 
tion which  he  has  in  his  possession  useful  to  the  credit 
man  in  an  honorable  way,  this  type  of  attorney  can 
render  a  great  deal  of  valuable  service  to  credit  men. 

Bank  References 

Banks  are  used  in  many  countries  by  mercantile  insti- 
tutions as  an  important  source  of  credit  information.  In 
their  dealings  with  their  customers  and  from  the  prop- 
erty statements  which  they  receive,  it  is  possible  for  them 
to  furnish  a  great  deal  of  valuable  information  to  credit 
departments.  Upon  the  whole  they  have  refused  to  fur- 
nish to  credit  men  important  information  which  they 


1C8  MERCANTILE  CREDIT 

have.  They  have  insisted  that  in  the  United  States  it 
is  impossible  for  them  to  furnish  the  information  which 
credit  men  desire  without  being  false  to  their  own  clients 
and  without  injury  to  their  own  business.  The  credit 
information  which  credit  departments  receive  from  bank- 
ing institutions  is  practically  a  negligible  quantity. 

Traveling  Credit  Representatives 

Some  of  the  most  valuable  credit  information  is  ob- 
tained by  oral  investigation.  By  visiting  the  business 
house  which  is  seeking  credit  the  credit  representative 
can  learn  either  directly  or  indirectly  very  valuable  in- 
formation to  serve  as  a  basis  of  credit.  For  this  reason 
large  houses  doing  an  exclusive  credit  business  have  em- 
ployed traveling  credit  representatives  who  obtain  much 
valuable  credit  information  which  guides  them  in  grant- 
ing credit.  They  cover  the  same  territory  as  is  covered 
by  the  traveling  salesmen  and  they  obtain  their  informa- 
tion by  the  use  of  a  questionaire  which  is  filled  out  after 
a  personal  interview  with  the  seeker  for  credit.  This 
credit  representative  learns  incidentally  from  his  con- 
versation with  the  buyer  many  subsidiary  facts  which 
are  important  in  granting  credit.  He  learns  all  he  can 
from  court  records  and  from  conversations  with  other 
men  in  the  community.  When  he  leaves  the  office  to 
visit  these  men,  he  goes  prepared  with  all  the  facts  that 
the  credit  office  can  furnish  as  a  preliminary  to  the  mak- 
ing of  an  investigation.  In  some  cases  these  traveling 
credit  representatives  examine  the  books  of  debtors  and 


SOURCES  OF  CREDIT  INFORMATION    169 

confer  with  them  in  detail  on  the  management  of  their 
business.  This  is  done  only  when  the  debtor's  status 
is  precarious,  and  when  somewhat  drastic  methods  must 
be  pursued.  In  ordinary  cases  of  credit  investigation 
nothing  of  this  sort  could  be  done  without  the  loss  of 
customers. 


CHAPTER  X 

SOURCES  OF  CREDIT  INFORMATION 

CREDIT  EXCHANGE 

A  system  of  credit  exchange  has  developed  in  the  last 
fifteen  years  as  the  most  accurate  and  in  many  respects 
the  most  important  source  of  credit  informa- 
tion.    This  system  was  the  outgrowth  of  the 
velopment  .....  .     . 

of  credit      organization   of   local   associations   of   credit 

exchange      men.     Local  as  yet  in  character,  it  is  the  most 

in  last  important  factor  in  many  communities  in  the 

fifteen  ,.  „         ..,  .  . *  . 

years.  granting  of  credit,  and  it  promises  to  occupy 

a  more  important  place  in  the  future  in  the 
system  of  credit  giving.  Business  men  are  the  only 
source  of  credit  information.  A  knowledge  of  a  man's 
credit  or  of  what  credit  he  ought  to  have  must  be  sought 
in  his  experience,  that  is  from  those  with  whom  he  deals. 
Other  factors  of  a  subsidiary  character,  such  as  his 
environment,  capital,  habits,  etc.,  must  be  noted.  The 
Credit  Exchange  Bureau  represents  an  attempt  by  busi- 
ness men  to  learn  from  each  other  about  the  credit  stand- 
ing of  their  customers.  It  is  the  outgrowth  of  an  en- 
deavor to  obtain  the  most  accurate  information  of  this 
character  from  each  other  with  the  least  effort  and 
expense. 

170 


SOURCES  OF  CREDIT  INFORMATION    171 

The  information  furnished  by  the  Credit  Exchange 
Bureau  is  chiefly  from  ledger  experience,  and  this  has 
been  proved  to  be  the  most  valuable  informa-    Exchange 
tion  to  the  credit  man.     It  is  supplementary    0f  ledger 
to  and  a  corrective  of  data  collected  by  mer-    informa- 
cantile  and  other  agencies  and  does  not  sup- 
plant   them.     While    the    mercantile    agency    procures 
information  on  the  past  experience  of  a  business  man, 
his  character,  his  habits,  his  ability,  his  environment 
to   do   business,    the   Credit   Exchange   Bureau  limits 
itself    chiefly    to    one  source    of    information,    ledger 
and  trade  experience.      While  no  one  would  discount 
the  value  of  the  general  character  of  the  information 
procured   by    other    sources  as   a  basis  of  credit,  the 
function    performed    by    the    Exchange    Bureau    is    a 
different  one. 

The  inadequacy  of  other  classes  of  information  was 
responsible  for  the  development  of  the  Credit  Exchange 
Bureau.  The  age  of  the  mercantile  agency  value  of 
report  and  the  method  of  procuring  it  are  ledger  in- 
often  arguments  against  it.  Allowance  must  formation- 
be  made  for  the  reports  of  salesmen  since  the  buyer  is 
often  his  friend.  The  local  attorney  or  agent  is  a 
fellow  townsman  of  the  buyer  and  often  his  neighbor. 
Besides,  the  buyer  who  intends  to  defraud  sellers,  em- 
ploys methods  which  usually  delude  all  other  agencies.  A 
favored  practice  of  such  is  to  keep  good  accounts  with  a 
few  houses,  which  are  given  as  references,  while  goods 
are  purchased  from  a  large  number  with  no  intention 
of  paying  for  them. 


172  MERCANTILE  CREDIT 

When  the  first  attempts  were  made  to  exchange  ledger 
information   after   the   local    credit   men's   associations 
were  formed,  credit  men  were  skeptical  about 
Business      furnishing  the  desired  facts.     It  was  feared 
!?e°  that  they  would  give  up  valuable  business 

skeptical      information,    that    they    would    give    their 
about  ex-     competitors    an    advantage,    and   that    they 

changing      wou^  furnish   information   concerning  their 
ledger  in-  , 

formation,  customers  which  they  had  no  right  to  sur- 
render. This  general  attitude  of  suspicion, 
which  existed  among  business  men  years  ago,  prevented 
the  organization  of  business  men's  associations  of  all 
sorts,  and  their  cooperation  for  common  ends.  Where 
ledger  information  was  exchanged  it  became  an  important 
factor  in  developing  a  friendly  feeling  between  business 
men  and  in  developing  a  cooperative  spirit  among  them, 
which  was  utilized  for  other  purposes. 

Soon  after  some  of  the  local  credit  men's  associations 
were   formed    cooperative  plans   were   adopted  for   ex- 
changing information  with  reference  to  debtors. 

Exchange     ^y^jj  some  0f  the  associations  the  credit  clear- 
bureaus  of  .  . 
local             mS  house  work  of  furnishing  credit  information 

credit  became  the  prominent  feature.     In  1900  there 

men  *  were  credit  exchange  systems  in  six  cities : 

tioas  Detroit,  New  Orleans,  Baltimore,  Cincinnati, 

Sioux  City,  and  Minneapolis.     The  methods 

of  these  may  be  grouped  into  what  may  be  termed  the 

New  Orleans    and  the  Minneapolis  systems. 

In  the  former  the  reports  of  merchants  cover  three 

important  items:  (1)  Orders  that  have  been  declined 


SOURCES  OF  CREDIT  INFORMATION    173 

for  any  reason;  (2)  merchants  who  are   delinquent  in 
their   payments   or   are   otherwise   unsatisfactory   cus- 
tomers; (3)  "  attorneys  who  disregard  instruc- 
tions,   are    slow   in    reporting   or    remitting 

,i       •  i  .  ,  -  ..  Orleans 

collections,    charge    excessive    fees,    fail    to    system. 

answer  letters  of  inquiry,  or  are  otherwise 
derelict  in  their  duty."  Each  member  was  given  a 
blank  upon  which  to  fill  out  a  report.  Each  was 
furnished  with  a  number,  so  that  it  was  unnecessary  to 
sign  a  name  to  a  report.  So  long  as  members  complied 
with  instructions  the  system  was  successful,  but  it  broke 
down  on  account  of  their  lack  of  interest. 

In  the  Minneapolis  system  members  were  required  to 
bring  to  each  meeting  lists  of  those  whose  orders  had 
been  rejected  and  of  those  whose  accounts  had    The 
been     placed     for     collection.     The     reports    Minne- 
covered  simply  these  two  items.     The  reports    apolis 
were  read  in  open  meetings  and  comments     ys  e 
were  made.     Each  member  had  a  number  which  he  used 
in  making  his  report.     Individuals  outside  of  the  asso- 
ciation who  reported  were  assigned  numbers,  and  lists 
were  kept  of  them.     With  a  key  to  reports  each  member 
could   determine   what   house   had   made   a   particular 
report  and  then  make  an  individual  inquiry. 

The  commendable  feature  of  the  system  consisted 
in  its  simplicity.  The  varying  success  of  the  different 
methods  used  by  the  local  associations  seems  to  demon- 
strate that  no  method  can  succeed  which  requires  much 
labor  to  make  it  effective. 

The  simple  exchange  bureaus  organized  at  first,  either 


174  MERCANTILE  CREDIT 

developed  into  more  comprehensive  systems  or  else  failed 

and  gave  way  to  thoroughly  organized  Credit  Exchange 

-  Bureaus.     These  may  be  divided  at  present 

classes  of     into  two  classes:     1.     "A  method  by  which 

bureaus       ledger  facts  and  other   information  are  ob- 

ay*         tained  through  the  representatives  of  credit 

departments.     2.     A    method    of  entering  information 

upon  forms  provided  for  that  purpose,  these  forms  being 

afterward  assembled  and  a  compilation  made  of  all  the 

information  acquired."1 

An    office   is    established   with    suitable    filing    cases 

and  a  secretary  placed  in  charge  of  it.     In  the  first 

method  a  list  is  made  out  of  all  members  of 

The  card      ^e  bureau,  and  a  number  is  assigned  each 

index 

system.        one'     This  list  is  furnished  all  members  of 

the  association  so  that  when  a  reference  is 
given  by  number  it  will  be  possible  for  those  interested 
to  use  the  list  as  a  key  and  know  at  once  the  other  mem- 
bers interested  in  a  given  case.  Each  member  is  re- 
quired to  furnish  a  list  of  his  customers.  A  card  is  made 
out  for  each  of  these,  and  on  the  card  is  written  the  num- 
bers of  all  those  who  sell  to  the  purchaser. 

When  an  inquiry  is  made  concerning  the  standing  of 
a  customer  of  any  of  the  members,  the  secretary  looks 
through  the  filing  case  for  the  customer's  card.  As  this 
contains  the  numbers  of  all  those  who  have  dealings 
with  the  purchasers,  the  numbers  are  sent  to  the  inquirer. 
By  examining  his  list  or  key,  the  inquirer  knows  who  the 
others  are  who  have  dealings  with  his  prospective  pur- 

1  Prendergast:  Funds  and  Their  Uses,  p.  207. 


SOURCES  OF  CREDIT  INFORMATION    175 

chaser.  These  he  calls  by  telephone  or  he  sends  a 
messenger  to  make  inquiries  of  them.  The  information 
furnished  is  oral  but  is  taken  from  the  books.  Other 
information  of  a  general  character  may  also  be  obtained. 

One  of  the  commendable  features  of  this  method  is  its 
simplicity.  An  office  that  will  do  the  work  satisfactorily 
may  be  maintained  at  small  expense.  The  one  seeking 
information  can  secure  it  at  once,  and  in  a  few  hours  he 
can  have  what  he  desires  to  know  of  his  purchaser. 

By  the  second  method  of  credit  interchange,  written 
reports  are  furnished  those  wishing  them.     A  list  is  made 
of  all  members  of  the  bureau  and  a  number  is    ^ 
assigned  each,  the  same  as  in  the  first  method,    credit  re- 
Inquiry  blanks  are  furnished  those  seeking    Port 
information,    and  inquiries  are    made    from    sys  em* 
them.     If  each  member  seeks  information  about  a  large 
number  of  his  customers  in  course  of  time  the  Bureau 
will  have  nearly  all  the  information  its  members  desire. 

Each  morning  the  secretary  of  the  Bureau  assembles 
all  the  inquiry  blanks  received.  Requests  are  then  made 
for  information  from  all  members  with  whom  the  cus- 
tomer has  had  dealings.  The  blanks  call  for  information 
on  the  credit  standing,  the  amount  owing,  the  amounts 
due,  the  methods  of  payment,  etc.  This  information  is 
compiled  into  a  report  and  furnished  the  member  desiring 
the  information.  In  some  bureaus  a  copy  of  each  report 
is  sent  to  all  members.  The  organization  of  the  office  and 
its  equipment  are  in  no  important  respects  different 
from  that  in  the  first  method  described. 

The  Committee  on  Mercantile  Agencies  and  Credit 


176  MERCANTILE  CREDIT 

Cooperation  of  the  National  Association  of  Credit  Men  in 

1910  sent  questionnaires  to  all  the  local  credit  men's 

associations  to  learn  to  what  extent  the  local 
Extent  to 
which  associations  had  established  credit  exchange 

each  bureaus,  to  learn  the  methods  used,  and  the 

system  is  extent  to  which  dealings  were  carried  on  with 
those  outside  the  associations.  Replies  from 
thirty  having  credit  exchange  bureaus  were  received.1 
Of  these  thirteen  used  the  first  method,  the  card  index 
system,  while  seventeen  used  the  second  system,  that  of 
compiling  information.  Eleven  of  thirteen  associations 
using  the  card  index  system  were  willing  to  exchange 
credit  information  with  outsiders,  while  only  four  of 
the  seventeen  that  compile  credit  information  were 
willing  to  furnish  information  to  outsiders.  The  card 
index  system  permits  dealing  with  outsiders  to  a  much 
greater  extent  than  the  other  system,  as  in  the  latter  sys- 
tem detailed  information  would  have  to  be  furnished 
non-members  who  contribute  nothing  to  the  support 
of  the  bureau.  An  exchange  of  information  with 
those  outside  the  bureau  is  frequently  desirable,  as 
is  the  case  especially  with  such  mercantile  agencies  as 
those  of  the  Bradstreet  Company  and  R.  G.  Dun  and 
Company. 

The  system  of  compiling  credit  information  has  its 
limitations  for  another  reason.  Business  houses  are 
The  s^^  very  skeptical  about  furnishing  accurate 

compiling  information,  to  be  made  relatively  general  with 
system.        reference   to   classes   of   customers   they   are 

1  Bulletin  National  Association  of  Credit  Men,  July,  1910. 


SOURCES  OF  CREDIT  INFORMATION    177 

carrying  who  are  heavily  burdened  with  debt.1 
These  customers  are  often  seeking  credit  with  other 
houses  and  if  all  the  facts  were  known  they  might  be 
denied  credit.  The  failure  to  receive  credit  by  such 
houses  would  often  result  in  their  insolvency,  a  condi- 
tion detrimental  to  the  house  which  is  carrying  them 
and  which  has  furnished  the  damaging  information. 

Another  obstacle  in  the  way  of  the  interchange  of 
credit  information  consists  in  the  unwillingness  of  large 
firms  with  thousands  of  customers  to  exchange  informa- 
tion with  business  establishments  having  only  a  few  custo- 
mers. The  larger  house  would  rarely  learn  anything  from 
the  ledger  experience  of  the  smaller  house,  while  it  would 
be  a  perfect  mine  of  information  to  the  smaller  business 
establishments  and  would  be  frequently  used  by  them. 

The  Committee  on  Credit  Cooperation  of  the  National 

Association  of  Credit  Men  was  created  by  an  amendment 

to  the  constitution  of  that  association  pro-    Exclian„e 

viding  for  such   a  committee,  passed  at  its    0f  ledger 

annual    meeting    at    New    Orleans    in    1910.    informa- 

Prior  to  this  the  work  of  credit  cooperation     |on    y 

.  those  not 

came  within  the  province  of  the  Committee  on    members 

Mercantile  Agency  Service  and  Credit  Coop-    of  credit 
eration.     It  has  been  shown  in  the  chapter    exchange 
on  Mercantile  Agency  Service  that  this  com- 
mittee was  one  of  the  most  active  committees  of  the 
National  Association  of  Credit  Men,  and  that  its  chief 
interest  consisted  in  promoting  the  exchange  of  credit  in- 
formation.    Both  it  and  its  successor,  the  Committee  on 
1  Prendergast :  Credit  and  Its  Uses,  p.  211. 


178  MERCANTILE  CREDIT 

Credit  Cooperation,  have  urged  upon  members  of  the 
National  Association  to  exchange  ledger  information 
freely.  As  a  result  of  this  persistent  campaign  the 
number  of  inquiries  received  by  some  members  of  the  as- 
sociation has  increased  to  such  an  extent  that  they  have 
been  compelled  to  employ  a  clerk  whose  time  is  devoted 
exclusively  to  answering  these  inquiries.  The  unfairness 
of  receiving  ledger  information  without  giving  data  in 
return  and  the  danger  of  breaking  down  the  system  of 
exchanging  ledger  information  by  those  not  members  of 
bureaus  which  are  organized  for  this  purpose,  have 
induced  the  Credit  Cooperation  Committee  to  devise 
uniform  blanks  to  be  used  by  members  of  the  National 
Association  of  Credit  Men  when  seeking  ledger  informa- 
tion. When  one  member  of  the  association  wishes 
credit  information  with  reference  to  one  of  his  cus- 
tomers, it  is  but  fair  that  he  give  the  man  who  is  to 
favor  him  with  a  reply  the  benefit  of  his  own  experience. 
It  is,  moreover,  only  by  this  method  of  mutual  ex- 
change that  any  results  of  far  reaching  importance  can 
be  secured. 

At  the  meeting  of  the  National  Association  of  Credit 
Men  held  in  Boston  in  June,  1912,  the  Committee  on 
Credit  Cooperation  submitted  as  a  part  of  its  report 
seven  rules  which  were  to  govern  members  of  the  Na- 
tional Association  of  Credit  Men.  These  rules  which 
were  adopted  are  as  follows: 

1.  The  blank  adopted  and  recommended  by  the 
National  Association  of  Credit  Men  for  the  making  of 
inquiries  always  to  be  used. 


SOURCES  OF  CREDIT  INFORMATION    179 

"2.  Each  inquiry  shall  state  the  amount  of  the  order 
and  always  indicate  if  first  order. 

"3.  If  the  inquirer  has  had  previous  experience  with 
the  one  inquired  on,  then  the  inquiry  shall  be  accompanied 
by  a  statement  of  such  experience.  This  encourages 
reciprocal  interchanges  of  experience  and  views. 

"4.  Inquiries  are  not  to  be  made  except  on  orders 
actually  in  hand  or  on  open  account.  If  investiga- 
tion is  being  made  with  a  view  to  soliciting  business  or 
collecting  an  account,  a  letter  explicitly  stating  this  fact 
should  accompany  the  inquiry. 

"5.  It  is  fundamental  that  all  inquires  are  to  be  treated 
confidentially,  and  under  no  circumstances  divulged  to 
the  subject  of  the  inquiry. 

"6.  All  inquiries  to  be  answered  on  the  day  received 
and  by  the  credit  man  or  manager  if  possible,  so  that  the 
ledger  experience  and  any  additional  information  in  his 
possession  may  be  furnished. 

"7.  A  compliance  with  these  rules  in  this  interchange 
of  credit  experience  and  information  leads  to  accuracy, 
reciprocation,  promptness  and  confidence.  Their  obser- 
vance will  mean  a  closer  contact  between  the  members 
of  this  Association,  and  be  of  great  assistance  in  their 
credit  investigations." 

Other  institutions  than  credit  associations  are  en- 
gaged in  credit  cooperation.  The  following  organiza- 
tions1 are  doing  in  this  line  satisfactory  work:  The 
Jewelers'  National  Board  of  Trade,  The  National  Asso- 
ciation of  Clothiers,  The  Electric  Trade  Association  of 

1  Bulletin  National  Association  of  Credit  Men,  July,  1905. 


180  MERCANTILE  CREDIT 

the  Pacific  Coast,  The  Merchants'  Credit  Association 
of  California,  The  Stationers'  Board  of  Trade  of  New- 
York,  The  Crockery  Board  of  Trade  of  New  York,  The 
Lumbermen's  Trade  Association,  The  Glass  Dealers' 
Protective  Association,  The  Manufacturers'  and  Dealers' 
Protective  Association  and  The  New  York  Paint  and 
Allied  Traders'  Association,  etc.  The  work  of  these  credit 
exchange  bureaus  is  very  satisfactory,  and  in  many 
respects  the  best  work  of  this  sort  is  done  by  agencies  in 
a  certain  trade. 

Personal  credit  or  credit  to  consumers  is  usually  given 

with  less  system  and  wisdom  than  credit  to  other  classes. 

Many  attempts  are  being  made  to  systema- 

Credit  ^ze  credit  to  consumers  by  merchants,  who 

exchange 

bureaus  of    excnange  credit  information  with  each  other 

retail  on  the   credit   standing   of  their   customers. 

mer-  The  best-developed  plans  of  this  class  have 

been    established    by  the    retail    merchants' 
asso-  (  J 

ciations.  associations  of  Columbus,  Ohio,  and  Indian- 
apolis, Indiana.  The  credit  system  of  the 
former  was  established  September,  1911,  and  of  the  lat- 
ter about  five  years  ago.  The  members  of  the  Colum- 
bus Association  are  sixty-five  of  the  leading  merchants 
of  the  city.  A  central  office  is  maintained  with  suit- 
able filing  cases,  and  the  secretary  of  the  retail  merchants' 
association  has  charge  of  the  office.  The  card  system 
is  used  for  filing  purposes  and  the  information  is  private. 
Numbers  are  used  to  designate  persons  and  a  code  is 
used  in  giving  the  standing  of  credit  applicants.  Each 
merchant  reports  all  his  credit  cases,  and  a  messenger 


SOURCES  OF  CREDIT  INFORMATION    181 

goes  out  from  the  central  office  each  day  to  collect  all 
new  information.  Two  girls  are  employed  in  a  private 
office  where  the  cabinets  are  placed,  using  telephones  to 
furnish  information,  when  it  is  requested,  to  the  members 
of  the  association.  Some  of  the  merchants  have  private 
wires  with  the  office.  Whenever  a  buyer  goes  to  a  store 
of  a  member  to  make  a  purchase  and  asks  for  credit,  if 
his  credit  standing  is  unknown,  the  merchant  calls  up 
the  office,  and  the  desired  information  is  furnished  at 
once  by  telephone.  If  more  detailed  credit  information  is 
desired  than  is  possessed  by  the  office,  a  credit  investi- 
gator is  sent  out  to  procure  all  the  information  which  is 
accessible.  For  the  purpose  of  obtaining  this  kind  of 
information,  the  office  of  the  association  has  established 
relations  with  many  of  the  banks,  manufacturing  insti- 
tutions, and  other  employing  agencies  where  the  people 
of  the  city  work.  Information  is  obtained  with  reference 
to  salaries,  business  prospects,  habits  of  life,  etc.,  of 
those  who  seek  credit. 

The  initiation  fee  of  the  members  of  the  Columbus 
Association  is  $50,  while  the  annual  dues  vary  from  $100 
to  $300  a  year,  the  amount  depending  on  the  service 
rendered.  The  cost  of  maintaining  the  Credit  Exchange 
Bureau  is  approximately  $5,000. 

The  success  of  this  plan  depends  almost  entirely  upon 
the  organizing  ability,  the  initiative,  and  the  persist- 
ence of  the  manager  of  the  office,  who  is  in  each  of  the 
above  cases  the  secretary  of  the  retail  merchants'  asso- 
ciation. In  both  cities  the  merchants  feel  that  the  main- 
tenance of  such  an  office  is  an  excellent  investment  on 


182  MERCANTILE  CREDIT 

account  of  the  amounts  which  may  be  saved  by  avoiding 
bad  debts  due  to  giving  credit  unwisely.  Neither 
association,  however,  is  prepared  to  prove  approximately 
how  much  is  saved  in  this  manner,  owing  to  many  con- 
fusing factors  in  estimating  losses.  The  plans  pursued 
in  both  of  these  cities  are  workable  in  all  large  cities, 
provided  the  right  kind  of  ability  can  be  secured  in 
managing  the  general  office. 

Retail  grocers  and  retailers  in  other  lines  have  credit 
exchange  bureaus,  of  which  the  Retail  Grocers'  Exchange 

Bureau  of  Columbus,  Ohio,  is  typical.     About 
Retail 
Grocers'       ^25  grocers  of  Columbus  maintain  a  central 

Credit  office  where  records  are  kept  of  the  credit 

Exchange     standing  of  the  customers  of  the  members. 

Each  grocer  sends  a  report  to  the  office  on  the 

credit  standing  of  his  customers  who  are  given  credit. 

Whenever  a  new  applicant  for  credit  comes  to  a  store,  the 

clerk  calls  up  the  central  office,  obtains  his  credit  record, 

and  then  withholds  or  gives  credit,  basing  his  decision  upon 

the  information  he  receives  from  the  central  office.     The 

great  obstacle  in  the  way  of  an  efficient  credit  exchange 

bureau  is  the  difficulty  of  getting  grocers  to  furnish  to 

the  office  promptly  complete  and  accurate  reports  of 

their  credit  customers.     The  grocers  have  been  urged  to 

withhold    credit    from    all    customers    who    owe    debts 

until  the  debts  have  been  paid,  but  it  has  been  found 

impossible  to  enforce  this  provision. 

The    credit    exchange    bureau    may    be    made    most 

serviceable  to   all   business  establishments   when   it  is 

made  national  in  its  scope.     At  present  there  is  some 


SOURCES  OF  CREDIT  INFORMATION    183 

interchange  of  information  between  bureaus  in  the  same 
territory,  such  as  the  Cincinnati,  Columbus,  and  Youngs- 
town  bureaus  in  Ohio:  but  there  is  no  definitely  organized 
system  for  the  exchange  of  credit  information  between 
bureaus  not  in  the  same  territory. 

Unfortunately  mercantile  credit  is  at  present  local 
and  not  national.  Banking  institutions  are  local  units, 
each  community  depending  on  its  own  re-  rre^jt 
sources  for  funds.  The  local  associations  exchange 
exchanging  information  should  extend  their  national  in 
scope  and  provide  an  exchange  bureau,  which  scope* 
would  be  a  clearing  house  of  information  for  all  the 
United  States.  Then  the  Bureau  would  have  valuable 
information  for  all  classes  of  business  men.  Before  this 
end  can  be  consummated  it  will  be  necessary  to  have 
well  organized  bureaus  of  exchange  in  all  sections  of  the 
United  States.  At  present  only  a  beginning  has  been 
made.  Hundreds  of  communities  have  no  credit  men's 
associations  at  all  and  no  exchange  bureaus.  All  the 
trades,  too,  should  be  organized  on  a  national  basis. 
There  is  a  business  consciousness  of  kind  among  members 
of  a  trade,  and  a  national  organization  can  be  perfected 
more  easily  than  the  organization  of  a  National  Ex- 
change Bureau  from  the  various  local  organizations  repre- 
senting diverse  interests.  The  cooperation  of  both 
groups  is  necessary  to  a  great  Credit  Exchange  Bureau 
national  in  scope.  When  this  is  accomplished  mercan- 
tile credit  will  no  longer  be  local  but  national,  and  the 
funds  of  the  whole  country  may  be  made  available  for 
carrying  on  the  mercantile  business  in  any  community. 


CHAPTER  XI 
ADJUSTMENT  BUREAUS 

The  adjustment  bureaus  have  developed  within  the 
last  decade  as  credit  institutions.     When  the  National 

Association  of  Credit  Men  first  took  formal 
adjust-  notice  of  them  at  its  Memphis  meeting  in 
ment  1905  by  the  appointment  of  a  special  Corn- 

bureaus  mittee  on  Adjustment  Bureaus,  several  local 
and  their  .    ,.  r  ■,.,  ,     ,. 

associations  01  credit  men  were  conducting 
aims.  ° 

adjustment  bureaus.  After  making  a  thor- 
ough canvass  of  the  work  of  the  various  adjustment 
bureaus  then  in  existence,  this  committee  in  its  report 
to  the  Baltimore  meeting  of  the  National  Association  of 
Credit  Men  held  in  1906  set  forth  the  fundamental  aims 
and  objects  of  these  bureaus  as  follows: 

1.  To  investigate,  upon  request,  the  affairs  of  a  debtor 
reported  to  be  insolvent  and  adjust  the  estate,  when 
possible  without  court  proceedings. 

2.  To  secure  capable  and  efficient  receivers,  ap- 
praisers or  trustees  when  court  proceedings  are  found  to 
be  necessary. 

"3.  To  secure  quick  adjustment  of  all  honest  failures  at 
the  minimum  cost  and  with  the  maximum  dividend  to 
creditors. 

"4.  To  facilitate  and  economically  secure  extensions 

184 


ADJUSTMENT  BUREAUS  185 

or  liquidations  when  upon  investigation  it  is  found  to 
be  to  the  best  interests  of  all. 

"5.  To  influence  concerted  action  by  the  creditors  for 
the  benefit  of  all. 

"6.  To  assist  creditors  to  acquire  for  their  own  use  the 
estate  of  failing  or  insolvent  debtors,  when  mutually 
agreed  upon. 

"7.  To  prosecute  or  assist  in  the  prosecution  of  the 
guilty  party  or  parties  where  investigation  discloses 
fraud  or  the  intent  to  defraud."1 

The  functions  of  the  adjustment  bureaus  as  above 

stated  show  quite  clearly  the  conditions  which  gave  rise 

to    them.     When    a    debtor    was    in    failing 

circumstances  there  was  usually  an  absence  of    ~ondl~ 

tions 
concerted  action  on  the  part  of  creditors  in-    givjng 

terested.     The  debtor's  estate  was  frequently    rise  to 
dissipated  so  that  there  was  little  or  nothing    adJust~ 
to  be  divided  when  action  was  taken  against    bureaus 
him.     When  receivers,  appraisers,  and  trus- 
tees were  appointed,  they  were  frequently  incompetent 
and  were  often  friends  of  the  debtor  and  acted  in  his 
interests.     When  attorneys  were  appointed  they  often 
had  an  inadequate  knowledge  of  commercial  law,  and 
as  a  rule  made  excessive  charges  for  their  services.     In 
general  there  was  an  absence  of  concerted  action  by 
creditors  to  protect  their  own  interests,  to  preserve  the 
estates  of  worthy  debtors,  and  to  punish  the  fraudulent. 

The  value  of  an  adjustment  bureau  may  be  seen  by  con- 
trasting its  methods  with  the  usual  clumsy  and  expensive 

1  Bulletin  National  Association  of  Credit  Men,  July,  1906. 


186  MERCANTILE  CREDIT 

methods  of  procedure  in  closing  an  estate.  The  in- 
vestigation of  a  failure  ordinarily  proceeds  slowly.  Where 
Value  of  credit  exchange  bureaus  do  not  exist,  the 
adjust-  business  of  a  bankrupt  may  be  in  very  bad 
ment  condition  before  bankruptcy  proceedings  are 

begun.  A  fraudulent  debtor  may  escape,  or  his 
assets  may  be  wasted,  or  his  books  and  other  data  may 
be  missing.  Absence  of  concerted  action  is  frequently 
responsible  for  delay.  Where  the  failure  is  not  a  fraud- 
ulent one,  lack  of  harmony  among  creditors,  and  the 
haphazard  methods  of  handling  estates,  lead  to  a  com- 
promise at  a  small  percentage  of  the  claims. 

The  ordinary  method  of  closing  estates  is  harmful 
to  the  debtor  also.  The  debtor  whose  liabilities  are  rela- 
Ordinarv  lively  heavy  is  always  in  danger  of  having 
method  of  action  taken  against  him  by  an  over-zealous 
closing  an    creditor.     As  long  as  creditors  act  independ- 

ently  there  is  always  a  temptation  to  hasty 
action  and  the  dissipation  of  the  estate  through  a  mul- 
tiplicity of  suits  and  executions.  As  soon  as  action  is 
taken  by  one,  others  follow  in  proceeding  against  the 
debtor's  property,  and  an  inventory  is  taken  of  it. 
Although  the  debtor's  assets  may  exceed  his  liabilities, 
yet  for  want  of  sufficient  funds  to  promptly  pay  his 
debts  he  may  be  forced  into  insolvency  or  bankruptcy. 
When  bankruptcy  has  been  thus  precipitated  the  trustee 
is  practically  compelled  to  sell  the  stock  at  a  discount  as 
he  sells  it  under  the  conditions  of  a  forced  sale  and  this 
together  with  the  costs  of  closing  estates  leaves  credi- 
tors less  than  their  original  claims. 


ADJUSTMENT  BUREAUS  187 

Where  the  adjustment  bureau  exists  if  a  member  comes 
in  possession  of  knowledge  that  one  of  his  debtors  is  in 
failing  circumstances,  he  must  notify  the  sec- 
retary  of    his   adjustment    bureau   at   once.    tates  are 
The  latter  calls  a  meeting  of  the  creditors,    closed  by 
who  carefully  canvas  the  situation.     If  there    adjust- 

are  many  creditors,  a  committee  of  creditors  is    , 

*'  bureaus. 

appointed  with  power  to  act,  and  the  foreign 
creditors  are  notified.  An  adjuster  is  usually  sent  to 
secure  a  financial  statement  from  the  books  of  the  debtor, 
and  if  necessary  he  takes  an  inventory  of  his  property. 
The  committee  of  creditors  then  acts  with  full  knowledge 
of  the  debtor's  condition,  and  grants  the  debtor  an  ex- 
tension of  time  if  the  circumstances  seem  to  warrant  it. 
If  it  is  desirable  that  a  trustee  be  placed  in  charge,  the 
debtor  is  asked  to  make  an  assignment  to  him,  and  if  he 
refuses  to  do  so,  he  is  made  an  involuntary  bankrupt. 
Appraisers  will  be  selected  who  have  a  special  knowledge 
of  the  business  and  know  how  to  estimate  the  value  of 
the  bankrupt's  property.  If  an  assignment  is  made, 
experts  or  men  trained  in  closing  estates  are  employed. 
Men  skilled  in  collecting  accounts  and  in  disposing  of  mer- 
chandise are  appointed,  with  the  result  that  the  bank- 
rupt's property  is  disposed  of  at  the  least  possible  loss. 
As  will  be  shown  later,  the  costs  of  closing  bankrupt 
estates  by  adjustment  bureaus  are  much  less  than  by  the 
ordinary  methods.  Only  when  it  is  absolutely  necessary 
are  debtors  required  to  make  assignments.  Those  with 
small  as  well  as  large  accounts  and  the  foreign  as  well  as 
the  local  creditors,  are  all  treated  alike. 


188  MERCANTILE  CREDIT 

The  plan  of  organization  of  adjustment  bureaus  varies, 

but  all  of  them  pursue  practically  the  same  methods. 

The  active  work  of  the  bureau  is  in  the  hands 

an  .  of  either  the   secretary,    manager,   or   both, 

organiza- 
tiQ^  A  firm  of  attorneys  is  usually  retained,  and 

their  fees  are  definitely  limited  by  the  bureau. 
When  the  bureau  serves  a  creditor  upon  his  request,  he 
alone  pays  the  expenses.  When  it  serves  all  the  creditors 
of  a  debtor,  the  expenses  are  divided  among  them.  A 
creditor  in  a  remote  section  of  the  country  can  get  a 
bureau  to  take  up  the  case  of  a  debtor  residing  in  its 
district,  and  then  give  no  further  attention  to  it.  The 
bureau's  attorneys  on  account  of  wide  experience  are 
usually  experts  in  handling  claims,  and  the  creditor, 
wherever  he  resides,  is  assured  superior  ability  in  looking 
after  his  interests. 

The  question  has  been  raised  frequently  in  the  annual 
conferences  of  the  National  Association  of  Credit  Men  as 

to  whether  the  adjustment  bureaus  should 
adiust-  become  in  any  sense  collection  agencies, 
ment  Previous  to  1912  some  of  the  bureaus  had  made 

bureaus        a  practice  of  collecting  claims,  and  much  op- 

collect 

position  had  arisen  against  this  policy.  Those 
in  favor  of  the  bureau's  undertaking  this  work 
claimed  that  in  certain  sections  of  the  country  it  could 
perform  the  best  service  to  its  members  by  collecting  ac- 
counts. Those  opposed  to  this  policy  contended  that 
the  function  of  the  bureau  was  to  investigate  a  debtor's 
financial  condition,  and,  where  he  was  solvent  but  in 
failing  circumstances,  to  preserve  his  business,  if  possible 


ADJUSTMENT  BUREAUS  189 

from  failure ;  to  act  as  trustee  of  his  estate,  where  his 
success  was  hopeless,  to  manage  it  economically,  and  to 
preserve  as  much  of  it  as  possible  for  distribution.  It 
was  further  insisted  that  an  association  of  credit  men 
should  keep  itself  free  from  commercialism  and  it  should 
make  it  obvious  to  the  critics  of  the  Association  that  a 
credit  men's  association  is  not  organized  for  the  purpose 
of  enforcing  the  payments  of  claims  due  to  its  members; 
and  that  if  it  is  to  carry  out  the  ideals  of  the  National 
Association  of  Credit  Men,  that  of  being  an  institution  to 
serve  the  general  purposes  of  credit  men,  it  should  keep 
itself  free  from  the  taint  of  commercialism,  which  would 
inevitably  follow  the  collection  of  specific  debts.  It  was 
finally  decided  at  a  conference  of  adjustment  bureau 
managers  held  in  Chicago  in  1912,  and  at  the  National 
Conference  of  Credit  Men  of  the  same  year,  that  the  ad- 
justment bureau  should  "not  handle  delinquent  ac- 
counts for  collection  as  bureaus,  nor  should  the  managers 
or  commissioners  of  such  bureaus  handle  such  delinquent 
accounts  in  their  official  capacity." 

The  policy  to  be  pursued  with  reference  to  the  noti- 
fication of  creditors  when  a  debtor's  affairs  are  under 
consideration  has  often  been  a  mooted  ques- 
tion.    Some  favored  the  notification  of  those      ,0.1..y 

creditors. 

only  who  were  members  of  adjustment  bu- 
reaus, while  others  favored  the  notification  of  all  credi- 
tors. Those  in  favor  of  the  former  policy  insisted  that 
creditors  not  members  of  any  bureau  might  not  be  in 
sympathy  with  the  work  of  the  bureaus  and  consequently 
might  give  their  claims  into  the  hands  of  attorneys  or 


190  MERCANTILE  CREDIT 

collection  agencies,  a  procedure  which  would  thus  in  a 
measure  defeat  the  ends  of  the  bureau  that  had  the 
matter  in  charge.  It  was  definitely  decided  by  the 
National  Association  of  Credit  Men  at  its  annual  confer- 
ence in  1909  that  if  any  creditor  should  be  notified,  all 
should  be  notified  regardless  of  their  membership  in 
bureaus. 

There  are  three  methods  of  organization  of  adjust- 
ment bureaus:  1.  "the  corporate  form,  in  which  stock- 

-,.  holders  are  limited  to  members  of  a  local  asso- 

Tnree 

methods  ciation,  and  the  management  is  in  the  hands 
of  organ-  0f  a  salaried  employee;  2.  the  general  corpo- 
iza  ion.  ra^e  form^  -n  some  cases  without  the  stock- 
holding feature,  with  the  management  in  the  hands  of 
an  attorney  employed  on  the  fee  basis,  he  at  the  same 
time  being  actively  engaged  in  the  general  practice  of  the 
law;  3.  the  committee  form  of  management,  a  committee 
composed  of  representative  members  handling  each  case 
on  its  own  merits,  engaging  such  assistance,  legal  and 
otherwise,  as  may  be  deemed  necessary."1 

It  would  seem  that  the  work  can  be  carried  on  more 
successfully  by  the  first  method,  as  a  salaried  employee 
of  ability  interested  in  the  work  of  the  association  can 
give  much  more  effective  services  than  either  an  agent 
hired  from  without  or  a  committee  which  must  from  time 
to  time  employ  legal  talent. 

The  relation  between  the  National  Association  of 
Credit  Men  and  the  bureaus  of  the  local  associations 

1  Bulletin  National  Association  of  Credit  Men,  July,  1910, 
p.  510. 


ADJUSTMENT  BUREAUS  191 

have  all  along  been  mooted  questions.     At  the  Chicago 
meeting  of  the  National  Association  of  Credit  Men  it 
was  decided  that  the  adjustment  bureau  of  a 
city  should  be  affiliated  with  the  local  associa-    Relation 
tion  of  its  district  to  be  recognized   by   the    jyatjonai 
National  Association  of  Credit  Men.1    It  was    Associa- 
further  decided  that  a  uniform  style  of  name    t*011  of 
should  be  adopted  by  each  adjustment  bureau;    M 

viz.,    Adjustment    Bureau    of    the   bureaus. 

Association  of  Credit  Men.  The  advisabil- 
ity of  appointing  an  agent  in  the  office  of  the  National 
Association  to  have  supervision  of  the  local  association 
was  recommended.  Opposition  arose  to  too  close  a 
supervision  of  the  local  bureaus  by  the  National  Asso- 
ciation, and  it  was  finally  concluded  that  the  super- 
vision should  be  general  in  character  only  and  that  each 
local  bureau  should  be  permitted  to  solve  its  own  local 
problems. 

As  a  rule  the  charges  of  the  bureau  go  to  the  treasury 
of  the  local  Credit  Men's  Association,  and  become  a  fund 
to  bear  the  expenses  of  the  bureau.     These    jncome 
charges  are  uniform  to  all  members  of  the    from  ad- 
National  Association  of  Credit  Men  and  its    justment 
affiliated  branches  and  are  not  to  exceed  10 
per  cent,  of  the  amount  to  be  distributed  to  creditors 
except  for  unusual  services.     In  some  local  associations 
the  fee  is  limited  to  5  per  cent,  of  the  dividends  for  ser- 
vices as   trustee,  while    a    higher    charge   is   made    to 
outsiders. 

1  Bulletin  National  Association  Credit  Men,  July,  1907,  p.  425. 


192  MERCANTILE  CREDIT 

In  another  association  the  adjustment  bureau  employs 

an  auction  house  to  handle  the  stocks  of  bankrupts.     The 

goods  of  the  bankrupt  are  not  sold  in  bulk  at 

a  sacrifice,  as   is  usually  the  case,   but  are 
auction  . 

house.  broken  up  in  small  lots  and  sold  at  retail,  the 

auction  house  handling  the  goods  at  10  per 
cent,  commission.  In  this  way  much  more  is  realized  on 
the  stock.  The  adjustment  bureau  may  fix  a  minimum 
price  on  the  goods,  and  if  this  is  not  secured  the  auction 
house  will  purchase  them,  after  which  they  are  sold  in 
the  usual  way.  When  this  method  is  pursued  creditors 
do  not  need  to  wait  till  the  goods  are  sold  but  receive  a 
portion  of  the  sum  due  them  at  once;  and  later  when  the 
stock  is  disposed  of,  they  receive  the  balance  due  them 
in  the  form  of  dividends  after  the  agent  receives  his  share. 
The  experience  of  all  the  associations  which  have  ad- 
justment bureaus  shows  that  estates  can  be  closed  by 

„       .  the  bureau  at  a  much  lower  cost  than  that  re- 

Expen- 

ence  in  the  quired  when  they  go  through  the  regular  bank- 
economic  ruptcy  proceedings.  The  Adjustment  Bureau 
closing  of  Qf  ^he  los  Angeles  Credit  Men's  Association 
during  the  year  1909  received  from  estates 
$460,140  and  returned  to  creditors  in  dividends  $422,722, 
the  average  settlement  being  55.85  per  cent.  The  hand- 
ling of  half  a  dozen  cases  in  which  there  were  no  assets 
reduced  the  average  percentage  returned  to  creditors.  In 
1908  the  dividends  returned  to  creditors  were  over  60  per 
cent,  of  the  liabilities. x    The  Chicago  Adj  ustment  Bureau 

1  Bulletin  National  Association  of  Credit  Men,  March,  1910, 
p.  141. 


ADJUSTMENT  BUREAUS  193 

returned  to  creditors  over  60  per  cent,  of  the  liabilities  of 
insolvency  cases  at  the  end  of  the  first  six  months  of  1909. 
In  1909  the  Spokane  Bureau1  received  in  claims  $275,000 
and  paid  to  creditors  58.8  per  cent,  of  their  claims.  The 
Denver  Adjustment  Bureau,2  the  first  to  be  organized, 
made  its  seventh  annual  report  October  1,  1910,  and  the 
expenses  on  adjustment  were  2.9  per  cent,  of  the  funds 
collected.  The  report  shows  that  twenty-nine  cases  were 
handled,  and  the  creditors  received  41.3  per  cent,  on  lia- 
bilities. All  creditors,  whether  local  or  foreign,  whether 
members  of  the  association  or  not,  receive  the  same  atten- 
tion, as  it  is  the  policy  of  the  Denver  Bureau  to  place  all 
claims  on  an  equal  basis.  The  bureau's  success  has  been 
such  that  during  the  eight  years  of  its  existence  but  little 
business  has  been  turned  over  to  the  bankruptcy  court  in 
its  territory.  The  reports  of  the  various  bureaus  show 
that  in  insolvency  cases  creditors  receive  from  30  to  60  per 
cent,  of  their  claims,  whereas  in  insolvency  cases  handled 
by  other  agencies  creditors  receive  far  less — amounts  not 
exceeding  on  the  average  25  per  cent,  of  the  liabilities. 
The  adjustment  bureaus  accomplish  this  saving  by 
selling  goods  at  greater  advantage,  by  a  better  system  of 
collecting  book  accounts,  by  eliminating  the  excessive 
charges  of  attorneys,  trustees,  etc.,  and  by  a  prompt 
settlement  of  estates.  However,  a  number  of  these  ad- 
justment bureaus  charge  membership  fees  which  help  to 

1  Bulletin  National  Association  of  Credit  Men,  March,   1911, 
p.  166. 

2  Bulletin  National  Association  of  Credit  Men,  February,  1910, 
p.  107. 


194  MERCANTILE  CREDIT 

defray  the  expenses  of  the  bureaus.     Where  the  adjust- 
ment bureau  is  operated  in  conjunction  with  a  credit  ex- 
change bureau,  as  is  the  case  in  thirty-four  of  the  forty- 
four  adjustment   bureaus,  a   great  force  is  exerted  to 
prevent  failures  by  forcing  settlements  before  estates  get 
into  a  desperate  condition. 

Adjustment  bureaus  are  widely  distributed  throughout 

the  country  but  are  more  numerous  relatively  in  the  West. 

There  are  twenty-two  bureaus  on  each  side 

is  n  u-      0£  £ke   Mjssiggippj   river.1   Of  those   east   of 

tion  of  ........ 

bureaus.       ^e  Mississippi  river,  nine  are  south  of  Mason 

and  Dixon's  line,  eight  are  in  the  Middle 
West  north  of  the  Ohio  river,  and  five  are  in  the  Middle 
Atlantic  States.  Of  the  five  in  the  Middle  Atlantic 
States,  Pennsylvania  has  four  and  New  York  one. 

The  special  committee  on  adjustment  bureaus  of  the 
National  Association  of  Credit  Men  made  an  extensive 

report  on  adjustment  bureaus  at  the  annual 

ences  of       meeting  at  Philadelphia  in  1906.     Beginning 

adjust-         with  the  1907  annual  meeting,  the  Adjustment 

ment  Bureau  Committee  has  been  a  standing  com- 

m  mittee  of  the  National  Association  of  Credit 

managers. 

Men  and  one  of  the  very  active  committees 
of  that  body.  Since  then  there  has  been  an  annual 
meeting  of  the  officers  of  the  adjustment  bureaus  of  the 
country,  the  first  one  meeting  in  Cleveland,  Ohio,  in  1907 
and  the  last  one  meeting  in  Chicago,  111.,  in  January, 
1913. 

1  Bulletin    National   Association   of   Credit    Men,    July,    1912, 
p.  592. 


ADJUSTMENT  BUREAUS  195 

At  the  Chicago  conference  of  adjustment  bureau  man- 
agers in  1912,  the  following  "rules  and  principles  of  con- 
duct for  adjustment  bureaus  connected  with  affiliated 
branches  of  the  National  Association  of  Credit  Men  "  were 
adopted.  As  these  were  also  adopted  by  the  National 
Association  of  Credit  Men  at  its  conference  held  in 
Boston  in  June,  1912,  they  represent  a  late  development 
in  adjustment  bureau  policy  and  method. 

"l.  The  adjustment  bureau  to  be  established  by  and 
under  the  absolute  control  of  the  local  association  of 
credit   men.     If   the   local  association  is  in- 
corporated, it  may  be  optional  with  that  asso-     Rules  °* 
•     •  iiii-  i  i  associa- 

ciation  whether  the   adjustment    bureau   be      tions. 

separately  incorporated.  If  the  local  associa- 
tion is  not  incorporated,  it  is  suggested  that  the  adjust- 
ment bureau  be  separately  incorporated  and  governed 
by  a  board  of  directors  selected  by  the  local  association; 
if  not  incorporated,  governed  by  a  committee  appointed 
by  the  local  association. 

2.  Adjustment  bureaus  are  primarily  established  for 
the  benefit  and  service  of  the  members  of  the  National 
Association  of  Credit  Men  and  its  affiliated  branches  for 
the  saving  of  expense  in  administering  solvent  and  in- 
solvent estates  in  which  they  may  be  interested;  but  such 
bureaus  shall  not  handle  delinquent  accounts  for  collec- 
tion as  bureaus,  nor  are  the  managers  or  commissioners  of 
such  bureaus  to  handle  such  delinquent  accounts  in  their 
official  capacity. 

3.  A  delinquent  account  within  the  meaning  of  Rule 
2  is  one  that  is  considered  uncollectable  upon  present 


19G  MERCANTILE  CREDIT 

demand,  and  is  not  placed  for  the  purpose  of  investigation 
or  adjustment. 

"4.  The  adjustment  bureau  is  to  be  operated  by  a 
manager  or  commissioner  selected  by  the  governing 
committee  or  board  of  directors. 

"5.  Each  adjustment  bureau  shall  have  an  adjuster, 
who  may  be  the  manager,  commissioner,  or  one  of  his 
assistants.  He  shall  make  investigations  at  the  request 
of  any  member  of  the  association  at  a  compensation  not 
to  exceed  $15  per  diem  and  expenses. 

'  6.  In  the  absence  of  other  agreement,  should  the  ad- 
juster discover  upon  investigation  that  the  affairs  of  a 
debtor  or  debtors  need  general  adjustment,  then  the 
adjustment  bureau  which  the  adjuster  represents 
shall,  without  further  instructions,  proceed  to  the  ad- 
justment of  the  debtor  or  debtors'  affairs  for  the  benefit 
of  all  creditors;  in  which  event,  the  expenses  of  the  in- 
vestigation shall  be  pro  rated  against  all  claims  handled 
by  such  bureau,  unless  otherwise  provided  for. 

7.  If  the  estate  to  be  adjusted  or  liquidated  is  located 
in  a  city  where  an  adjustment  bureau  is  located,  and 
where  there  are  other  creditors  of  the  estate  in  interest, 
there  shall  be  cooperation  between  the  bureau  where  the 
estate  is  located  and  the  originating  bureau;  but  if  the 
estate  is  not  located  in  such  city,  then  the  adjustment  is 
to  be  made  under  the  supervision  of  the  bureau  where  the 
adjustment  originated. 

8.  The  manager  or  commissioner  of  the  adjustment 
bureau  where  the  investigation  or  adjustment  originated 
is  to  advise  immediately  the  managers  or  commissioners 


ADJUSTMENT  BUREAUS  197 

of  all  adjustment  bureaus  where  creditors  are  located, 
and  also  all  creditors.  He  shall  also  suggest  to  the 
creditors  that  it  is  preferable  that  claims  be  forwarded 
through  the  local  adjustment  bureau,  or  that  creditors 
can  forward  claims  direct.  The  local  bureaus  shall  be 
kept  fully  advised  by  the  operating  bureau  of  the  prog- 
ress of  the  case. 

"9.  An  allowance  not  exceeding  one-third  of  the  com- 
missions charged  on  claims  is  to  be  allowed  the  bureau 
on  such  claims  as  are  forwarded  by  that  bureau  or  sent 
direct. 

"10.  The  adjustment  bureaus  are  formed  not  to  make  a 
profit,  but  for  economical  administration  for  the  benefit 
of  those  interested — therefore  all  charges  shall  be  rea- 
sonable, the  schedule  of  charges  adopted  by  each  adjust- 
ment bureau  to  be  filed  with  the  national  office,  and  with 
the  chairman  of  the  Adjustment  Bureau  Committee. 

11.  A  committee  consisting  of  the  chairman  of  the 
National  Adjustment  Bureau  Committee,  and  one 
member  thereof,  two  adjustment  bureau  managers, 
and  the  secretary-treasurer  of  the  national  association, 
shall  constitute  a  committee  of  complaint  to  arbitrate 
all  complaints  between  adjustment  bureaus  or  between 
members  and  bureaus,  and  the  decision  of  a  majority 
of  such  committee  shall  be  binding  upon  all  parties  in 
interest,  and  such  decision  filed  with  the  national  asso- 
ciation's committee. 

12.  Reports,  at  least  quarterly,  shall  be  furnished  the 
national  office  of  the  estates  adjusted  in  each  of  the 
local  adjustment  bureaus." 


198  MERCANTILE  CREDIT 

The  adjustment  bureau  managers  at  their  recent  con- 
ference in  Chicago,  January,  1913,  took  a  decided  stand 
for  uniformity  in  operating  adjustment  bureaus.  It 
was  contended,  however,  that  as  some  bureaus  had  been 
organized  for  years  it  would  be  inadvisable  to  attempt 
to  enforce  a  uniform  operating  plan,  but  that  uniformity 
and  a  high  standard  of  bureau  efficiency  could  be  gradu- 
ally secured  by  a  system  of  cooperative  supervision. 
To  carry  out  this  program  it  was  recommended  "that 
the  country  be  divided  into  seven  zones,  and  that  in 
each  zone  there  be  appointed  a  committee  of  not  less 
than  three  nor  more  than  five  whose  functions  it  will  be 
to  have  the  direct  oversight  of  the  bureaus  in  each  zone, 
to  investigate  complaints,  to  arbitrate  disputes,  and  to 
bring  about  a  cooperation  of  the  work  in  each  zone. 
These  committees  should  be  appointed  by  the  National 
Committee  on  Adjustment  Bureaus  and  the  National 
Secretary  and  Treasurer  subject  to  the  approval  of  the 
national  president.  The  committees  should  be  respon- 
sible to  the  National  Board. "  The  adjustment  bureau 
managers  recommended  further  that  every  local  associa- 
tion of  credit  men  should  organize  an  adjustment  bureau 
upon  plans  approved  by  three  committees,  the  zone  com- 
mittee, the  national  committee  on  adjustment  bureaus, 
and  the  advisory  committee  of  the  board  of  directors  on 
adjustment  bureaus.  It  was  moreover  recommended 
that  no  new  bureau  should  be  organized  without  the 
approval  of  the  above  named  committees,  and  that  the 
zone  committee  should  withdraw  its  official  sanction 
from  any  bureau  which  was  not  properly  conducted. 


ADJUSTMENT  BUREAUS  199 

The  report  of  the  adjustment  bureau  managers  will 
be  submitted  to  the  National  Association  of  Credit  Men 
this  year  for  adoption.  This  report  represents  the  latest 
development  in  adjustment  bureau  work.  It  is  believed 
that  the  supervision  proposed,  if  put  in  practice,  will 
enable  the  bureaus  in  each  territory  to  work  in  better 
harmony,  to  standardize  their  methods,  and  to  do  a  much 
higher  grade  of  work  than  has  been  done  heretofore. 


CHAPTER  Xn 
COLLECTIONS 

As  the  success  of  a  credit  department  depends  in 
great  measure  upon  its  collection  service,  every  thor- 
oughly developed  credit  department  has  a 
of  collec-  well-organized  division  of  the  department,  or 
tions  to  an  adjunct  to  the  department,  devoted  to 
the  credit  the  collection  of  accounts.  The  work  of 
epatf  "  granting  credit  is  completed  only  with  the 
collection  of  the  accounts  created  by  the 
credit  department.  Whether  this  work  falls  within  the 
province  of  the  credit  man,  his  subordinates,  or  some 
allied  department,  the  collection  service  should  be  closely 
related  to  the  credit  department,  as  the  efficiency  of  the 
latter  is  measured  by  success  in  making  collections. 
The  purpose  of  the  credit  department  is  to  prevent 
losses,  and  if  accounts  are  not  collected  the  credit  depart- 
ment is  a  failure. 

The  kind  of  ability  needed  to  make  collections  is 
often  different  from  the  qualifications  demanded  for  a 
credit  man.  The  manager  of  collections 
Qualifica-  mus^  be  a  goocj  judge  of  human  nature,  and 
collector.  ne  snoulcl  possess  the  diplomacy  which  will 
enable  him  to  handle  successfully  the  great 
variety  of  credit  cases  with  which  he  must  deal.  The 
classes  of  creditors  determine  largely  the  policy  to  be 

200 


COLLECTIONS  201 

pursued.  The  most  desirable  creditors  require  but  little 
effort  to  make  collections.  However,  if  a  business  were 
limited  alone  to  these,  a  strong  credit  department 
would  be  unnecessary  and  but  little  cost  would  be 
entailed  in  making  collections.  Under  present  day 
competitive  conditions  credit  must  be  extended  to  all 
classes,  to  the  doubtful  as  well  as  to  the  safe  credit 
risks;  and  the  manager  of  collections  must  have  as 
varied  qualifications,  although  of  a  different  kind,  as  the 
credit  man  himself. 

All  are  agreed  that  the  first  essential  to  successful 
collections  is  to  call  for  payment  when  an  account  is  due. 
No  debtor  can  object  to  being  called  upon  to 
carry  out  his  agreement  to  pay  a  debt,  and  in       PromPt 

colic  C™ 

general  debtors  are  inclined  to  pay  promptly       tions. 
when  called  on  to  do  so.     Moreover,  careless- 
ness in  collecting  tends  to  develop  habits  which  demor- 
alize debtors  and  make  collections  difficult. 

As  most  collections  are  made  by  mail,  a  system  which 
will  enable  the  collection  office  to  take  up  promptly  and 
to  handle  properly  all  accounts  is  necessary  Qgjce 
to  every  large  business  which  deals  extensively  system  to 
in  credits.  Various  systems  of  card  indices  follow  col- 
are  in  use.  A  common  method  is  to  place  ec  ons* 
each  credit  account  on  a  separate  card.  The  card  has 
blank  spaces  for  the  name,  rating,  address,  terms,  date 
of  invoice,  the  amount  of  debt  and  when  the  account  is 
due.  Some  cards  have  also  blank  spaces  to  indicate  when 
a  draft  is  made  out  for  collection  and  when  it  is  returned, 
to  give  the  comment  of  the  debtor  and  a  record  of  the 


202  MERCANTILE  CREDIT 

final  disposition  of  the  account.  These  cards  are  kept 
in  a  tickler  and  so  arranged  that  the  one  who  has  charge 
of  collections  can  turn  at  once  to  the  oards  having  records 
of  accounts  due  on  a  certain  day.  If  for  certain  reasons 
the  collection  of  some  of  these  accounts  is  to  be  postponed 
to  later  dates,  the  proper  entries  are  made  on  the  cards, 
and  they  are  placed  with  others  which  are  due  on  the 
same  designated  dates.  By  this  system  all  the  accounts 
may  be  properly  handled  when  due,  and  with  little 
effort  the  one  who  has  charge  of  collections  may  know 
when  and  in  what  order  the  accounts  of  a  business  become 
due. 

While  this  system  is  advantageous  to  most  businesses, 
in  many,  especially  the  smaller  concerns,  the  one  who 
Advan-  ^as  cnarSe  of  collections  relies  on  the  informa- 
tages  of  tion  he  can  obtain  directly  from  the  ledger 
an  office  from  day  to  day.  Others  depend  on  their 
ys  e  *  memory  or  on  note-book  memoranda  and  con- 
sult the  ledger  when  other  methods  fail.  While  the 
keeping  of  credit  reference  and  collection  cards  takes 
time,  this  work  can  be  done  by  subordinates;  and  as  the 
tickler  may  be  placed  on  the  desk  of  the  one  who  has 
charge  of  collections,  the  information  he  desires  is  at 
hand  on  a  moment's  notice.  If  he  depends  on  his  ledger 
for  information  he  must  often  go  into  an  adjoining 
room  to  consult  it,  and  while  he  fails  to  economize  his 
own  time  he  disturbs  the  work  of  the  bookkeeper  or 
accountant. 

In  the  retail  business  the  practice  is  general  of  making 
collections  the  first  of  each  month  by  rendering  state- 


COLLECTIONS  203 

ments  to  debtors.     Of  all  accounts  these  are  perhaps 
the  easiest  to   collect.     Consumers   as  a   class  receive 
credit  with  the  expectation  of  paying  their 
bills  by  checks  the  first  of  each  month,  and    methods 
retailers  grant  credit  under  the  assumption    of 
that  payments  will  be  made  promptly  at  the    collecting 
close  of  the  month.     Many  of  the  latter  pre- 
fer to  have  payments  made  in  this  way  rather  than  by 
cash.     Most  of  the  accounts  rendered  are  itemized,  and 
after  the  account  is  returned  to  the  seller  accompanied  by 
a  check  it  is  again  returned  to  the  purchaser,  receipted. 
When   goods    are  delivered,    an  itemized  statement  is 
usually  sent  with  the  package. 

Instead  of  sending  accounts  by  mail  some  firms  em- 
ploy collectors  to  visit  debtors  to  make  collections. 
These  collectors  present  a  statement  of  the  account  to 
the  debtor,  and  if  the  latter  pays  at  once  either  in  cash 
or  by  check,  the  collector  receipts  the  bill  in  the  name 
of  the  firm  and  gives  it  to  the  debtor.  Whatever 
advantages  this  system  may  give  to  the  business  houses 
that  employ  collectors,  debtors  prefer  to  receive  state- 
ments of  accounts  through  the  mail  and  to  pay  by 
check. 

Accounts  may  be  divided  into  (1)  live  and  (2)  tardy 
accounts.  A  live  account  is  one  which  is  just  due,  or 
one  which  is  not  yet  due,  while  a  tardy  ac-  Two 
count  is,  as  its  name  implies,  one  that  is  over  classes  of 
due.  It  is  the  latter  class  of  accounts  which  accounts« 
receives  attention  in  any  consideration  of  the  subject  of 
collections. 


204  MERCANTILE  CREDIT 

The  consideration  of  live  accounts  is  important  be- 
cause if  they  receive  adequate  attention  much  less  effort 
will  be  necessary  to  collect  tardy  accounts. 

When  an  account  is  due  it  should  be  collected 
accounts. 

promptly  unless  there  is  a  good  reason  for 

granting  further  time  to  the  debtor.  However,  before 
an  account  matures  the  creditor  should  know  how  his 
debtor  is  treating  other  accounts,  for  slowness  in  making 
payments  is  the  first  dange*  signal.  If  the  debtor  is 
slow  in  paying  other  accounts,  the  creditor  has  every 
reason  to  believe  that  he  will  be  slow  in  paying  his 
account,  and  business  failures  are  almost  invariably  pre- 
ceded by  a  period  of  tardiness  in  paying  debts. 

When  a  debtor  is  slow  in  making  payments,  the  cred- 
itor should  investigate  at  once  the  causes  of  his  tardiness. 
Causes  of  ^  ^e  various  factors  responsible  for  business 
delay  trouble  the  debtor  himself  is  directly  respon- 

in  sible  for  some  of  them,  while  others  arise  from 

paying.  causes  over  which  he  has  no  control.  To 
act  wisely  the  creditor  should  have  a  correct  interpre- 
tation of  the  situation.  While  creditors  must  count 
on  debtors  paying  their  obligations,  the  embarrassed 
debtor  must  rely  on  the  assistance  of  merchants  wno  will 
sell  to  him  if  he  is  ever  to  recover  from  his  embarrass- 
ment. At  this  point  the  creditor  has  an  opportunity 
for  the  exercise  of  superior  judgment.  Many  worthy 
debtors  have  been  made  bankrupts  by  the  rash  actions 
of  their  creditors  in  collecting  accounts,  who  if  leniency 
had  been  shown,  could  have  recovered  and  become 
prosperous.     Upon  the  other  hand,   through  the  free 


COLLECTIONS  205 

granting  of  credit  and  through  the  failure  to  make  col- 
lections promptly,  many  debtors  have  developed  habits 
of  slow  payment  and  loose  habits  of  business  in  other 
respects,  which  have  resulted  in  insolvency. 

As  soon  as  accounts  are  due  debtors  receive  statements 
of  the  account  with  request  for  payment.  It  is  chiefly 
to  obviate  the  failure  to  present  claims  for 
payment  when  due  that  systems  of  collection  1TS 
are  devised.  However,  few  would  advocate  collecting, 
the  following  of  the  same  system  or  the 
same  routine  in  all  cases  when  debtors  fail  to  pay  at 
maturity.  A  system  planned  with  the  view  of  treat- 
ing all  debtors  alike  is  a  faulty  system.  Differences 
in  customs  and  practices  of  different  trades  and  busi- 
nesses and  differences  in  personality,  must  be  regarded 
especially  in  the  initial  stages  of  tardy  accounts.  Before 
more  drastic  methods  are  pursued  such  as  the  sending 
of  drafts  for  collection,  putting  accounts  in  the  hands 
of  collectors,  personal  letters  are  usually  sent  to  debtors 
inquiring  why  the  payment  is  not  made  and  urging  that 
the  debt  be  paid  promptly.  If  the  customer  is  a  desir- 
able one,  care  is  taken  not  to  lose  his  trade  by  offending 
him.  If  drastic  action  must  be  taken,  it  is  usually 
assumed  that  the  customer  is  lost  to  the  creditor. 

Perhaps  the  most  common  way  of  making  collections 

from  delinquent  debtors  is  by  the  draft.     The  sending  of 

a  statement  to  a  debtor  when  his  account    „,.     .    „ 

The  draft, 
matures  is  the  first  step  taken  to  collect  a 

debt.     The  use  of  a  draft  to  collect  is  ordinarily  the  next 

step.     The  time  which  elapses  between  the  sending  of  a 


206  MERCANTILE  CREDIT 

statement  and  a  draft  varies  with  the  business  practices. 
Some  mail  a  draft  at  once  as  soon  as  the  creditor  learns 
that  a  check  did  not  come  by  return  mail.  This  is, 
however,  unusual,  as  creditors  ordinarily  make  allow- 
ances for  delays  and  some  even  go  so  far  as  to  exhaust  all 
other  means  in  the  way  of  sending  statements  repeatedly 
and  accompanying  their  statements  with  letters  to  the 
debtor,  before  a  draft  is  sent  for  collection. 

When  a  draft  is  used  it  is  either  given  to  a  local 
banker  to  be  sent  by  him  to  a  bank  for  collection  in  the 
community  where  the  debtor  is  engaged  in  business,  or  it 
is  sent  directly  by  the  creditor  to  a  bank  in  the  debtor's 
city.  If  it  is  sent  by  the  latter  method,  a  letter  of 
instruction  is  usually  enclosed  with  the  draft  in  which 
the  banker  is  directed  to  collect  at  once  and  remit  the 
proceeds  or  to  return  the  draft  giving  reasons  why  the 
debtor  refused  to  pay.  At  the  time  the  draft  with  the 
letter  is  sent  to  the  banker,  a  communication  is  usually 
sent  to  the  debtor,  telling  him  that  a  draft  for  a  given 
amount  has  been  placed  in  the  hands  of  a  banker,  and 
directing  him  to  pay  the  debt  to  the  banker.  If  the  draft 
is  placed  in  the  hands  of  the  creditor's  bank,  the  latter 
sends  the  draft  with  instructions  to  a  bank  in  a  commun- 
ity where  the  debtor  lives,  and  this  bank  notifies  the 
debtor  that  a  draft  has  been  placed  there  for  purposes  of 
collection.  When  collections  are  made,  banks  deduct  a 
small  fee  for  the  service  rendered  before  sending  the  funds 
to  the  creditor.  When  collections  are  not  made,  banks 
do  not  receive  fees  for  the  service  they  render  only  in 
the  exceptional  cases  where  creditors  mail  a  small  fee 


COLLECTIONS  207 

with  the  draft  to  pay  bankers  for  their  service  whether 

payment  is  made  or  not. 

The  collection  agency  draft  system  was  devised  by 

collection  agencies  to  facilitate  the  collection  of  small 

amounts    by    drafts.     To    these    drafts    are      _.        , 

The  col- 
attached  stubs  directing  banks  to  place  the      lection 

drafts  in  the  hands  of  attorneys  named  on  the  agency 
stubs,  in  case  payment  is  not  made  to  the  draft 
bank.  This  method  has  the  merit  of  showing 
the  debtor  as  soon  as  it  is  presented  to  him  that  if  he  fails 
to  make  payment  the  draft  will  be  placed  immediately 
in  the  hands  of  an  attorney  for  collection.  Most  debtors 
are  thus  coerced  into  paying,  not  desiring  to  be  confronted 
with  the  action  of  an  attorney  to  collect  the  debt.  How- 
ever, the  system  has  its  demerits  on  account  of  the  drastic 
action  which  is  threatened.  The  credit  of  debtors 
suffers  in  the  minds  of  bankers  when  they  observe  the 
extremes  to  which  creditors  are  inclined  to  go  to  collect 
their  debts.  It  may  be  safely  stated  that  in  many  cases 
where  these  collection  agency  drafts  are  used  the  credit 
of  debtors  does  not  warrant  the  depreciation  caused  by 
the  use  of  these  drafts. 

When  debtors  fail  to  pay  drafts  when  presented,  the 
next  step  is  to  use  the  collection  letter.     At  first  a  mild 
letter  is  written  requesting  payment,  and  after 
this  each   succeeding  letter  demanding  pay-    .  „  ec  I0 
ment  becomes  stronger.     At  present  a  series 
of  collection  letters  is  prepared  by  collection  agencies 
in  the  order    named    and    sold    to    creditors.      When 
these  letters  are  sent  to  debtors  they  are  accompanied 


208  MERCANTILE  CREDIT 

by  envelopes  having  printed  on  them  the  names  of 
the  collection  agency,  and  they  consequently  impress 
debtors  with  the  idea  that  they  have  been  placed  in 
the  hands  of  an  outside  agency  for  collection.  Many 
debtors  respond  more  quickly  in  making  payments  on 
this  account.  This  is  the  psychology  of  the  collection 
letter. 

Many  systems  of  collection  letters  are  used.  Trade 
organizations  used  the  collection  letter  before  it  was 
produced  and  sold  by  private  agencies  to  creditors. 
These  are  used  now  by  many  trade  organizations,  and 
also  by  some  credit  men's  associations.  One  system 
requires  members  who  use  the  collection  letters  to 
notify  the  agency  or  collection  bureau  of  the  progress 
in  collecting  an  account,  and  if  payment  is  not  made  it 
takes  active  charge  of  the  account.  The  collection 
letter  is  ordinarily  used  only  when  the  future  trade  of 
the  debtor  is  not  considered  a  matter  of  importance  and 
no  care  is  taken  to  avoid  offending  him. 

After  all  other  means  have  been  exhausted  the  attorney 
is  resorted  to  as  the  last  resource  in  making  collections. 
When  an  attorney  is  called  in  it  is  usually 
Attorneys  decided  to  enforce  the  collection  of  the  account, 
lectors.  The  policy  of  resorting  to  this  method  varies 
widely.  Some  resort  to  a  method  of  enforce- 
ment soon  after  an  account  becomes  delinquent,  while 
others  defer  such  drastic  action  as  long  as  it  is  possible  to 
do  so.  The  costs  entailed  by  the  employment  of  an 
attorney  are  one  reason  for  deferring  this  action. 

When  an  attorney  must  be  employed  to  collect  an 


COLLECTIONS  209 

account,  there  is  often  some  question  as  to  whether  the 
debt  can  be  collected  or  at  least  collected  in  full.  This 
tends  to  make  the  creditor  hesitate.  The  attorney 
must  usually  content  himself  with  collecting  the  debt  on 
the  installment  plan,  else  he  must  bring  legal  action  to 
enforce  a  payment.  Ordinarily,  creditors  prefer  the 
partial  payment  plan  if  the  debt  will  be  paid  in  full  to 
the  legal  action  plan,  in  which  the  costs  of  collection  will 
be  greater,  and  in  which  there  will  be  some  risk  of  not 
receiving  the  payment  of  the  debt  in  full. 

To  facilitate  the  employment  of  suitable  attorneys  in 
a  community  at  a  distance  from  the  place  of  business  of 
the  creditor,  attorneys'  lists  are  furnished  by  publishing 
companies.  These  are  responsible  companies  with  repu- 
tations to  maintain,  and  they  endorse  the  attorneys  on 
their  published  lists.  Some  of  these  companies  guarantee 
to  their  subscribers  the  accounts  collected  by  the  attor- 
neys on  their  lists.  In  these  cases  the  lists  are  known  as 
"bonded  lists"  and  the  attorneys  as  "bonded  attorneys." 
Some  of  these  companies,  as  a  condition  of  being  held  re- 
sponsible for  the  amount  the  bonded  attorney  collects, 
require  the  subscriber  to  report  at  once  the  employment 
of  such  an  attorney. 

Some  large  firms  doing  an  extensive  credit  business 
make  their  own  lists  of  attorneys  who  are  employed  in 
adjusting  their  accounts.  They  prefer  to  investigate 
themselves  the  standing  and  character  of  all  the  attorneys 
they  employ  in  the  various  communities  where  they  do 
a  credit  business.  This  method  is  possible  only  with 
large  firms.     Some  do  not  employ  local  attorneys  but 


210  MERCANTILE  CREDIT 

send  their  own  attorneys  to  communities  where  their 
services  are  needed.  The  advantage  of  the  latter  system 
is  that  the  business  house  has  full  knowledge  of  the  man 
who  is  entrusted  in  making  collections.  By  the  latter 
method  there  is  some  disadvantage  in  unfamiliarity  with 
local  conditions,  and  in  some  instances  in  an  increased 
cost  in  collecting  debts. 


CHAPTER  XIII 

MERCANTILE  CREDITS  AND 
DEPRESSIONS 

It  will  be  the  aim  of  this  chapter  to  trace  the  influence 
of  one  force — mercantile  credits — upon  depressions  and 
crises.    MacLeod  states  the  purpose  of  credit 
"to  be  the  temporary  advance  or  creation  of         ... 
capital,   to  promote  an  operation  which  is 
expected  to  repay  the  capital  employed  in  its  promotion, 
as  well  as   certain  profits,   within  a  defined  period."1 
From  this  statement  of  the  purposes  of  credit  it  will  be 
seen  that  it  is  connected  with  business  transactions  which 
are  more  or  less  speculative  in  character,  and  when  credit 
is  created  that  cannot  be  sustained,  commercial  houses 
fail.     Commercial  relations  are  so  interwoven  and  com- 
mercial   factors   are  so  interdependent  that  one  great 
failure  may  bring  about  a  multitude  of  others,   with 
losses  of  sufficient  proportion  to  precipitate  a  crisis. 

Mercantile  institutions  are  at  the  present  time  so 
organized  that  it  is  impossible  to  do  business  on  a  cash 
basis.  The  question  as  to  whether  a  cash  is  better  than 
a  credit  system  is  not  pertinent  so  long  as  we  have  not 
learned  to  buy  and  sell  for  cash.  Our  present  credit 
system  has  developed  as  a  part  of  our  present  industrial 

1  MacLeod:  Theory  and  Practice  of  Banking,  p.  252. 

211 


212  MERCANTILE  CREDIT 

organization,  and  it  is  futile  to  discuss  how  things  would 
be  if  our  industrial  system  were  different. 

Mercantile  credit  consists  in  the  advancement  of  goods 
or  commodities  for  a  stipulated  period,  with  the  under- 
standing that  the  seller  has  a  right  of  action  against  the 
purchaser  at  the  expiration  of  this  period.  Mercantile 
credit  is  granted  when  the  seller  believes  that  the  pur- 
chaser will  be  able  to  pay  at  the  expiration  of  the  term  of 
credit.  The  theory  underlying  mercantile  credit  is  that 
the  buyer  will  pay  for  the  goods  advanced  from  the  pro- 
ceeds of  their  sale;  and  the  term  of  credit  is  in  theory  the 
period  required  to  sell  the  goods  and  realize  on  them. 
When  the  goods  are  of  such  a  character  that  a  long 
time  is  required  to  sell  and  to  realize  on  them,  then  a 
long  term  of  credit  prevails. 

In  distribution,  goods  may  pass  through  the  hands  of 
the  following  distributors: 

1.  The  grower  or  importer. 

2.  The  manufacturer. 

3.  The  wholesaler  or  jobber. 

4.  The  retailer. 

5.  The  consumer. 

The  first  four  of  these  use  goods  as  capital,  and  the 

fifth  must  pay  an  amount  for  them  adequate  to  cover  the 

original  cost  and  the  profits  of  all  the  dis- 

anne  s      tributing  factors.     As  business  is  now  organ- 
of  distn-       ..... 
bution.         lzec*  ^  1S  impossible  for  each  of  these  factors  to 

advance  the  capital  necessary  to  carry  on  its 

function  and  wait  until  it  is  rewarded  from  the  profits  of 

its   investment.     The   manufacturer   must  invest  in   a 


MERCANTILE  CREDITS  AND  DEPRESSIONS  213 

plant  and  then  wait  a  considerable  length  of  time  until 
the  product  is  produced,  sold,  and  paid  for,  before  he 
realizes  on  his  investment.  The  wholesaler  buys  from 
the  manufacturer  or  grower  and  sells  to  the  retailer,  but 
realizes  nothing  upon  the  capital  invested  in  the  goods 
until  they  are  sold;  if  the  goods  are  sold  on  time,  which  is 
often  the  case,  he  must  wait  often  several  months  before 
the  goods  are  paid  for.  The  retailer  buys  of  the  whole- 
saler and  realizes  nothing  until  his  goods  are  bought  and 
are  paid  for  by  the  consumer.  These  distributors  either 
must  have  capital  to  conduct  their  business  until  the 
product  is  sold,  or  else  have  capital  advanced  until  they 
realize  on  their  sales.  By  having  the  capital  advanced 
temporarily  they  greatly  extend  their  business.  It  is  to 
perform  this  function  that  banks  of  discount  have 
developed. 

A  credit  may  be  recorded  as  a  simple  book  account, 
as  a  bill  of  exchange,   as  a  promissory  note,  etc.     A 
creditor  may  secure  an  advancement  of  capital    Methods 
upon  a  debt  expressed  in  the  last  named  form,    of  giving 
The   manufacturer   who   sells   goods   to   the    mercantile 
wholesaler  on  time  accepts  a  promissory  note    cre  l ' 
from  him,  and  with  this  he  secures  an  advancement  of 
capital  from  his  banker  by  selling  the  note.     The  whole- 
saler is  then  under  obligation  to  the  manufacturer's 
banker  for  the  payment  of  the  note,  but  in  event  of  failure 
to  pay,  the  manufacturer  is  responsible.     The  whole- 
saler may  sell  the  same  goods  to  a  retailer  on  time  and 
receive  a  promissory  note  from  the  latter  for  the  amount. 
The  wholesaler  has  this  discounted  by  his  banker,  to 


214  MERCANTILE  CREDIT 

whom  the  retailer  must  pay  the  debt  at  the  expiration 
of  the  term  of  credit.  In  the  exceptional  cases  where 
the  consumers  give  notes,  the  retailer  may  sell  to  the 
consumer,  accept  his  note  and  have  it  discounted  at 
bank,  where  the  consumer  must  pay  the  debt  when  due. 
Two  persons  are  responsible  for  the  payment  of  each 
of  these  notes.  For  the  payment  of  the  note  dis- 
counted by  the  manufacturer's  banker,  both  the  whole- 
saler and  manufacturer  are  responsible;  for  the  payment 
of  the  note  discounted  by  the  wholesaler's  banker,  the 
retailer  and  wholesaler  are  responsible;  while  for  the 
payment  of  the  note  sold  to  the  retailer's  banker,  both 
the  consumer  and  retailer  are  responsible. 

It  is  usually  assumed  that  it  is  perfectly  safe  to  advance 
money  upon  notes  which  are  to  be  paid  from  the  sale  of 
goods,  as  there  is  real  property  in  existence  to  be  used 
for  the  payment  of  the  notes.  In  the  above  assumed 
case,  however,  money  is  advanced  in  purchasing  notes 
to  the  extent  of  approximately  three  times  the  value  of 
the  sales;  or  if  we  omit  the  loan  of  the  retailer,  as  the 
instance  is  an  exceptional  one,  money  is  advanced  to 
twice  the  amount  of  the  sales.  The  price  paid  by  the 
consumer  for  the  goods  must  cover  the  entire  costs, 
together  with  the  profits  of  the  distributors.  The 
failure  of  the  wholesaler,  retailer  or  consumer  to  pay 
might  make  it  impossible  for  all  of  them  to  pay,  in  which 
case  at  least  two  of  the  bankers  would  lose  to  nearly 
twice  the  value  of  the  goods.  In  the  case  assumed  three 
bankers  advanced  capital,  each  to  the  extent  of  a  par- 
ticular sale.     In  an  industrial  center  frequently  a  banker 


MERCANTILE  CREDITS  AND  DEPRESSIONS  215 

advances  capital  to  the  manufacturer,  wholesaler  and 
retailer  for  the  sale  of  the  same  goods.  In  event  of  failure 
in  these  cases  the  burden  of  losses  is  more  concentrated. 
Our  confidence  in  the  security  of  these  loans  is  quickly 
dispelled  when  we  reflect  that  there  is  often  twice  as 
much  money  in  outstanding  notes  as  there  is  property 
to  represent  it.  These  observations  will  at  least  go  to 
show  that  the  advancement  of  capital  by  bankers  must 
be  based  upon  the  honesty,  integrity,  and  business 
sagacity  of  borrowers  rather  than  upon  the  character  of 
the  individual  transaction  upon  which  the  capital  is  ad- 
vanced. In  times  of  normal  prosperity  the  likelihood 
of  loss  to  the  bank  is  not  great,  as  two  persons  are 
pledged  to  the  payment  of  each  note.  Of  course,  in 
case  of  a  collapse  of  a  business  house,  losses  are  likely  to 
fall  on  the  bank  with  which  the  house  deals,  as  it  is  ex- 
tremely improbable  that  all  its  obligations  are  so  secured 
that  no  losses  to  the  bank  result.  With  the  collapse  of 
a  business  house,  others  are  certain  to  be  caught  in  the 
ruin,  and  then  the  general  security  of  these  houses 
alone  prevents  a  disastrous  reaction  upon  the  business 
community. 

Merchants  who  conduct  a  safe  business  are  compelled 
to  keep  funds  on  hand  to  tide  them  over  emergencies 
when  they  rise.     A  wholesaler  usually  sells 
largely  on  credit,  and  when  his  debtors  fail  to        .     .." 
meet  their  obligations  at  maturity,  if  he  pos- 
sesses no  surplus  capital,  he  becomes  unable  to  meet  his 
own  obligations  and   is    confronted  with    bankruptcy. 
Trading  up  to  the  limit  of  one's  means,  or  trading  without 


216  MERCANTILE  CREDIT 

holding  in  one's  possession  a  sufficient  amount  of  capital 
to  tide  over  emergencies,  is  overtrading.  When  his 
debtors  fail  to  meet  their  obligations,  the  wholesaler  is 
often  forced  to  have  his  bills  or  notes  discounted  even 
when  the  rates  charged  are  exorbitant.  With  him  there 
are  but  two  options,  high  interest  rates  or  bankruptcy. 
When  the  financial  condition  of  a  merchant  becomes  pre- 
carious, his  banker,  as  a  means  of  self-preservation,  be- 
comes conservative.  It  is  often  within  his  power  to  save 
or  ruin  the  merchant.  He  may  save  himself  by  permit- 
ting the  merchant  to  be  ruined,  or  if  he  grants  credit 
to  a  merchant  who  has  over-traded,  he  himself  runs  the 
risk  of  being  involved  in  the  ruin  of  the  merchant.  A 
happy  set  of  circumstances  may  so  prevail  that  a  mer- 
chant may  over-trade  for  years  without  suffering  loss. 
However,  losses  may  come  to  him  which  will  cause  his 
ruin  through  (1)  unfortunate  business  accidents  of  debt- 
ors, (2)  granting  credit  to  unworthy  business  men,  and 
(3)  general  reverses  in  business  conditions. 

The   statistics   of   banking   and   commercial   failures 
during  the  last  thirty  years  furnish  a  very  instructive 

.  „  object  lesson  on  the  general  causes  of  failures. 

Influence 

of  rising       During  periods  of  rising  prices  credit  is  freely 

and  falling  sought  and  as  freely  granted.  The  incentive 
prices  on  ^0  reaijze  wide  margins  leads  traders  to  ex- 
tend their  credit  as  far  as  possible  and  to 
make  the  utmost  use  of  their  capital.  While  prices  are 
rising  and  trade  is  brisk,  the  wholesaler  orders  freely 
from  the  manufacturer  and  enlarges  his  stock  with  the 
hope  that  larger  margins  may  be  realized  by  still  higher 


MERCANTILE  CREDITS  AND  DEPRESSIONS  217 

prices  on  the  goods  purchased.  The  retailer  orders 
freely  from  the  wholesaler  with  a  similar  motive.  Under 
these  conditions  the  manufacturers'  plants  are  taxed 
to  the  fullest  capacity  to  meet  the  demands  made  upon 
them.  Finally,  when  the  output  of  certain  classes  of 
goods  exceeds  the  real  demands  for  them,  the  upward 
movement  of  prices  is  stopped,  and  a  scramble  among 
dealers  begins  in  order  that  they  may  get  rid  of  their 
goods  before  they  begin  to  decline.  This  vigorous  com- 
petition to  dispose  of  stock  leads  to  a  further  decline  in 
prices,  and  mercantile  houses  that  have  indulged  in  over- 
trading go  to  the  wall.  Under  these  conditions  houses 
that  purchase  large  stocks  on  credit,  with  a  view  to  sel- 
ling on  wide  margins,  often  find  that  the  profits  from 
sales  are  inadequate  to  pay  the  original  costs,  and  that 
failures  are  certain  to  result  unless  emergency  funds  are 
at  hand.  It  takes  but  a  few  failures  to  react  on  other 
houses  which  likewise  have  over-traded,  and  finally  a 
general  ruin  of  business  institutions  takes  place. 

A  condition  of  rising  prices,  of  general  business  pros- 
perity, preceded  the  panic  of  1893.  During  1892  trade 
was  very  brisk.     But  few  plants  were  idle. 

Wholesalers  stocked  up  freely  and  retailers,    A  cause  of 

'  the  crisis 

to  get  the  advantage  of  wide  margins,  also    0f  isqz. 

purchased     extensively.     Unfortunately,     at 

such  times  traders  are  not  so  careful  to  adapt  their  supply 

to  the  demands  of  trade,  and  when  the  reaction  sets  in 

a  great  deal  of  unsalable  stock  is  left  to  tell  its  story  of 

speculation  in  the  production  and  in  the  sale  of  goods. 

Distributors  are  more  careless  in  granting  credit  in  pros- 


218  MERCANTILE  CREDIT 

perous  times  than  in  other  times,  and  when  the  reaction 
sets  in  the  ruin  is  more  complete.  When  the  reverses 
came  in  1893,  only  the  institutions  which  exercised  great 
discrimination  in  granting  credit,  and  those  which 
carefully  guarded  against  over-trading,  weathered  the 
storm  in  safety. 

The  years  of  1898  and  1899,  which  were  noted  as  the 
period  of  recovery  from  the  crisis  of  the  preceding  years, 
illustrate  clearly  the  phenomena  above  described.  The 
year  1899  stood  out  conspicuously  as  one  of  prosperity. 
It  was  a  year  of  generally  rising  prices.  Plants  were 
running  to  their  fullest  capacity,  many  of  them  both 
night  and  day.  Demands  were  brisk  in  nearly  all  lines 
and  wholesalers  and  retailers  competed  vigorously  in 
purchasing  large  stocks  of  goods  to  get  the  advantages 
of  the  wide  margins  which  are  always  inevitable  at  times 
of  rising  prices.  At  such  times  few  fail.  As  a  conse- 
quence, in  spite  of  our  enormous  increase  in  business 
institutions,  fewer  failures  with  smaller  losses  were  re- 
corded in  1899  than  in  any  year  since  1881.  In  the  early 
part  of  1900  the  upward  movement  of  prices  was  stopped. 
Institutions  which  had  over-traded  and  had  given  credit 
carelessly  were  ruined.  There  were  1,437  more  failures 
in  1900  than  in  1899,  and  the  liabilities  aggregated 
$47,615,784  more  than  in  1899.  Because  of  the  enlarge- 
ment of  operations  in  building  there  had  been  con- 
siderable speculation  in  building  materials,  and  with  a 
decline  in  price,  many  dealers  in  lumber  and  machinery 
failed.  If  the  price  reaction  had  been  more  general,  the 
failures  of  1900  would  have  been  more  wide  reaching. 


MERCANTILE  CREDITS  AND  DEPRESSIONS  219 

Dun's  Review  has  furnished  a  summary  of  the  num- 
ber of  failures,  with  the  liabilities  of  the  bankrupts  for 
each  year  since  1856.  It  is  difficult  to  draw 
any  conclusions  as  to  the  percentage  and  Number 
amount  of  failures  from  decade  to  decade  0f  failures, 
from  these  figures,  as  an  accurate  account 
cannot  be  taken  of  the  increase  in  wealth.  However,  for 
short  periods  the  fluctuations  in  the  number  and  amount 
of  failures  are  very  instructive.  The  amount  of  failures 
in  1857  was  enormous.  For  each  of  the  next  three  years 
the  failures  amounted  to  less  than  one-third  those  of 
1857.  Then  in  1861  the  failures  attained  enormous 
proportions.  During  the  remainder  of  the  war  and  for  a 
few  years  following,  the  statistics  of  failures  do  not 
include  the  Southern  States.  In  1873  the  failures 
amounted  to  over  $200,000,000.  In  1874  there  was  a 
decline  of  nearly  $50,000,000.  Then  for  the  next  three 
years  there  was  an  increase  in  failures,  the  maximum 
being  reached  in  1878.  A  reaction  with  fewer  failures 
took  place  in  1879.  Prosperity,  as  expressed  in  few 
failures,  continued  for  several  years.  Since  then,  as 
before,  few  failures  have  occurred  during  periods  of 
rising  and  many  during  times  of  falling  prices. 

Commercial  failures  are  inseparably  connected  with 
credit  giving.  The  frequency  and  the  enormity  of 
failures  are  traceable  to  the  extent  and  freedom  of 
granting  credit.  The  influence  of  changes  in  distribu- 
tive industry  upon  credit  and  failures  remains  to  be 
considered.  When  credits  are  long  and  transfers  are 
frequent,  a  great  number  of  accounts  that   represent 


220  MERCANTILE  CREDIT 

the  same  property  may  be  created,  and  where  this  is  true 
the  probabilities  of  failure  are  increased. 

During  recent  years  forces  have  been  at  work  not  only 
to  lessen  the  number  of  distributive  factors  but  to  put 
transactions  more  nearly  on  a  cash  basis, 
in  organ-  Under  the  old  distributive  system,  products 
ization  of  passed  through  the  hands  of  the  grower,  the 
mercantile  manufacturer,  the  jobber  and  the  retailer 
before  they  came  into  the  possession  of  the 
consumer.  Where  goods  were  imported  the 
number  of  distributing  factors  was  greater  still.  While 
these  distributing  agents  still  remain,  they  are  not  so 
important  as  formerly.  The  department  store,  the 
mail  order  house,  the  branch  store,  the  cooperative  pur- 
chasing combines,  and  institutions  which  organize  the 
means  of  distribution  in  connection  with  manufacturing, 
all  lessen  the  distributing  agents  and  hence  lessen  the 
extent  of  credit  created  for  the  purpose  of  disposing  of 
goods.  In  lessening  the  amount  of  credit  given  they  make 
failures  less  likely.  One  of  the  reasons  for  the  existence 
of  these  institutions  which  organize  the  distributing 
factors  is  to  put  buying  more  nearly  on  a  cash  basis; 
hence  less  credit  is  required.  The  indirect  influence  of 
these  institutions  has  a  remote  yet  positive  effect  on 
credit  giving.  The  competitive  influence  of  these  insti- 
tutions tends  to  lower  margins  realized  by  distributing 
factors.  Retail  dealers  generally  are  very  much  in- 
clined to  say  that  margins  are  so  narrow  that  they  must 
discount  their  bills  if  adequate  profits  are  realized. 
Wholesalers   are  practically   forced  to  take  the  same 


MERCANTILE  CREDITS  AND  DEPRESSIONS  221 

position.  In  order  to  conduct  a  profitable  business  it 
becomes  necessary  for  them  to  have  a  sufficient  capital 
to  tide  them  over  from  the  time  goods  are  purchased 
until  they  realize  on  their  sales.  Hence  the  tendency 
in  the  organization  of  distributive  business  to  drive 
down  the  margins  of  the  distributing  factors  is  resulting 
in  lessening  credit. 

Other  forces  have  been  at  work  in  the  United  States, 
which   increase   the   liability   to   failure    and    also   the 
amount  of  credit  giving.     When  insolvency 
occurs,    merchandise    is    a    quick    asset,    at    th 
current  value,  to  the  extent  that  it  conforms    character 

to    the    staple    type.     Articles    like    cotton,    ofcom- 

i     xi  it  iv         j  -  modities 

leather,  iron,  rubber,  sugar,  conee,  tea,  etc.,  ,       . 

upon  which  but  little  labor  has  been  devoted, 

can  be  turned  into  cash  much  more  quickly  and  with 

less  loss  than  the  more  highly  worked-up  manufactured 

products,  (which  may  be  classified  under  the  head  of 

specialties  or  novelties).     New  countries  manufacture 

only  the  cruder  kinds  of  articles.     It  requires  generations 

to  develop  skill  in  working  up  the  more  highly  developed 

textile  products,   and   it  has  been  only  recently  that 

the    United    States    has    been    taking    an    important 

rank   in   this   line   of   manufacture.     The   statistics   of 

textile  manufactures  in  the  United  States  from   1850 

to  the  present    time   show  how   rapidly   this    line   of 

manufactures    has   grown.     So  long   as   we   depended 

on  foreign  trade  for  textile  products,   trade  in  them 

was  more  nearly  on  a  cash  basis.     With  a  decrease  in 

the  importation  of  this  class  of  goods  and  an  increase 


222  MERCANTILE  CREDIT 

in  production  of  them  at  home,  trade  in  them  has  been 
converted  very  largely  from  a  cash  to  a  credit  basis. 
So  long  as  home  production  was  confined  to  commodities 
closely  approaching  the  staple  type  and  credit  was  created 
for  the  purpose  of  moving  them  when  a  merchant  be- 
came insolvent,  his  assets  were  quite  readily  convertible 
at  current  rates.  But  when  the  commodities  of  a  mer- 
chant are  largely  specialized  and  are  the  result  of  a 
great  deal  of  skill,  or  are  produced  to  satisfy  the  demands 
of  fashion,  then  in  event  of  bankruptcy  the  losses  incident 
to  the  forced  sale  of  such  goods  are  enormous.  Hence 
much  depends  upon  the  class  of  goods  manufactured  at 
home  in  influencing  the  frequency  and  extent  of  failures. 
Since  we  have  been  producing  to  a  large  extent  the 
more  highly  worked-up  textile  products,  dating  ahead 

has  been  introduced  and  it  is  invariably  asso- 
.    1  ,  ciated  with  the  giving  of  credit.     When  goods 

are  sold  dated  ahead,  the  term  of  credit  does 
not  begin  until  after  the  expiration  of  the  dating.  Manu- 
facturers often  sell  goods  before  they  are  produced,  and 
jobbers  sell  them  before  they  have  possession  of  them. 
The  payment  is  considered  a  cash  payment  if  the  goods 
are  paid  for  at  the  expiration  of  the  time  of  dating,  al- 
though the  goods  may  be  delivered  at  that  time  or  some 
time  in  advance  of  the  period  at  which  they  are  dated. 
Dating  ahead  not  only  actually  prolongs  the  time  of  credit 
but  it  indirectly  leads  to  its  extension.  As  all  extensions 
of  credit  increase  failures,  the  practice  of  dating  ahead 
may  be  considered  one  of  the  causes  of  failures.  There 
is,  however,  one  mitigating  circumstance  connected  with 


MERCANTILE  CREDITS  AND  DEPRESSIONS  223 

the  influence  of  dating  ahead  on  insolvency.  The  lack 
of  adaptation  of  production  to  consumption  is  more 
strikingly  seen  with  specialties  than  with  necessaries. 
In  dating  ahead  the  adaptation  is  shifted  from  the  pro- 
ducer to  the  retailer,  who  stands  close  to  the  consumer 
and  is  better  acquainted  with  his  wants.  Hence  dating 
ahead  on  this  account  tends  to  decrease  the  losses  due  to 
misapplied  production.  However,  this  economy  is  made 
less  effective  owing  to  carelessness  in  purchasing  by  re- 
tailers, carelessness  that  is  due  to  the  considerable  length 
of  time  which  may  be  allowed  to  elapse  between  the  time 
when  goods  are  ordered  and  when  they  may  be  paid  for 
under  the  system  of  dating  ahead.  This  is  due  to  the 
psychological  instinct  which  makes  people  more  careless 
in  purchasing  when  the  time  of  payment  is  postponed. 

All  these  factors  must  be  taken  into  account  in  con- 
sidering the  influences  which  operated  in  the  crisis  of  1893 
as  distinct  from  the  earlier  ones  in  the  United  States. 
The  census  statistics  for  1890  as  compared  with  those  of 
1880  show  a  wonderful  transition  during  that  decade  from 
industries  devoted  mainly  to  the  production  of  raw  prod- 
ucts to  those  of  manufacture.  During  the  decade  the 
population  increased  25  per  cent.  The  agricultural 
population,  however,  increased  but  10  per  cent.,  whereas 
those  engaged  in  manufacture  increased  49  per  cent,  and 
those  in  mining  49.3  per  cent.  The  number  of  acres  de- 
voted to  wheat  production  during  the  decade  decreased 
5  per  cent.,  while  the  corn  acreage  increased  but  15  per 
cent.  The  statistics  of  country  and  city  population  show 
an  increase  in  the  town  and  city  population  at  the  ex- 


224  MERCANTILE  CREDIT 

pcnse  of  that  of  the  country.  The  decade  was  marked  by 
a  very  large  increase  in  the  raw  materials  used  in  manu- 
facture, whereas  the  figures  on  textile  production  show  a 
rate  of  increase  twice  as  great  as  the  increase  in  popula- 
tion. The  great  increase  of  this  class  of  products  was 
marked  by  falling  prices,  with  the  usual  evil  consequences 
to  distributing  agents.  This  increase,  the  increase  in 
credit  transactions  which  accompanies  dealings  in  textile 
goods,  and  the  unsettling  of  normal  business  relations 
caused  by  important  changes  in  industry  are  more  re- 
sponsible for  the  crisis  of  1893  than  is  usually  attributed 
to  them. 

It  is  perhaps  safe  to  say  that  the  work  of  the  national 
and  local  credit  men's  associations,  the  work  of  credit 
exchange  bureaus,  the  improved  efficiency  of  mercantile 
agencies,  the  introduction  of  system  in  business  and  es- 
pecially in  credit,  and  the  production  on  definite  orders, 
more  than  counterbalance  the  weakness  of  the  credit 
system  resulting  from  a  prolongation  of  credit  through 
dating  ahead,  and  also  that  coming  from  the  influence 
of  the  production  of  highly  specialized  commodities. 
Consequently,  business  ruin  as  a  result  of  credit  giving 
will  be  less  complete  than  formerly. 


CHAPTER  XIV 

CREDIT  MEN'S  ASSOCIATION 

I.  HISTORY  OF  THE  NATIONAL  ASSOCIATION 
OF  CREDIT  MEN 

The  Credit  Men's  Association  can  be  traced  to  a  Com- 
mercial Congress  held  at  Chicago  at  the  World's  Fair  in 
1893.     One  section  of  this   Congress,  which    origin  of 
was  presided  over  by  P.  R.  Earling  of  Chicago,    National 
was  devoted-  to  the  subject  of  credits.     The    Associa- 
chief  paper  presented,  entitled  "The  Value 
of  Signed  Statements,"  was  read  by  Mr.  W.  H.  Preston 
of  Sioux  City,  Iowa,  who  has  since  been  prominently 
identified  with  both  national  and  local  associations  of 
credit  men.    Only  a  small  number  took  an  interest  in  the 
association,  but  a  committee  was  appointed  to  consider 
the  advisability  of  organizing  a  national  association.     On 
account  of  the  crisis  which  followed,  it  was  thought  a  very 
inopportune  time  to  organize  a  National  Association  of 
Credit  Men,  and  the  matter  was  delayed.     Finallyin  1896, 
after  several  local  organizations  of  credit  men  had  been 
formed,  arrangements  were  made  for  a  national  associa- 
tion to  meet  in  Toledo,  Ohio. 

Opposition  to  the  National  Association  came  from 
three   sources:  (1)  Mercantile   agencies   feared   that   it 

225 


226  MERCANTILE  CREDIT 

might  constitute  itself  into  a  reporting  agency  which 

would   displace  them,  or  that  it  would  demand  from 

_        .  .       them  better  service  than  they  could   afford 

Opposition  . 

t0  to  give.     (2)  Attorneys  feared  that  it  would 

National  put  them  at  a  disadvantage  in  regulating 
Associa-  £ees^  e^c#  (3)  Retailers  feared  that  it  might 
be  oppressive  to  them. 

The  purpose  of  the  National  Association  was  well 
stated  in  Article  II  of  the  Constitution:  "The  object  of 
Purpose  of  *^e  organization  shall  be  the  organization  of 
National  individual  credit  men  and  associations  of 
Associa-  credit  men  to  make  more  uniform  the  basis 
upon  which  credit  rests;  to  demand  a  change 
of  laws  unfavorable  to  honest  debtors  and  the  enact- 
ment of  laws  beneficial  to  commerce  in  the  several 
states;  to  improve  methods  of  diffusing  information 
and  of  gathering  data  with  respect  to  credits;  to  im- 
prove business  customs;  and  to  provide  a  fund  for  the 
protection  of  members  against  injustice  and  fraud." 

The   membership   was  divided  into  two  classes:  (1) 

The  organized  membership,  to  consist  of  credit  men  rep- 

.  resenting  individuals,  firms,  or  corporations, 

Member-  ... 

ship  of  w"°  may  Jom  through  the  medium  of  local 

National  associations;  (2)  the  individual  memberships, 
Associa-  ^0  consist  of  credit  men  representing  individ- 
uals, firms  or  corporations,  who  may  join  the 
association  directly.  The  latter  are  from  sections  of  the 
country  where  no  local  association  exists.  In  communi- 
ties where  there  are  local  associations  affiliated  with  the 
National  Association,  the  members  of   the  local  asso- 


CREDIT  MEN'S  ASSOCIATION  227 

ciation  represent  it  in  the  National  Association.  The 
organized  membership  thus  includes  the  membership 
of  all  the  local  associations  affiliated  with  the  national 
organization.  At  the  Toledo  meeting  in  1896  it  was  esti- 
mated that  the  volume  of  trade  represented  by  those 
present  amounted  to  $213,000,000.  The  growth  of  the 
association  is  indicated  from  the  following  facts.  The 
organized  membership  in  1900  was  2,511;  the  indi- 
vidual membership  was  490,  making  a  total  of  3,001. 
This  was  an  increase  of  465  over  the  membership  of  the 
previous  year.  On  the  first  of  June,  1904,  the  organized 
membership  was  4,528,  and  the  individual  799,  making 
a  total  of  5,327.*  On  the  first  of  June,  1905,  the  organized 
membership  was  5,085  and  the  individual  976,  making  a 
total  of  6,060,  or  an  increase  of  557  of  the  organized 
and  177  of  the  individual  membership  over  that  of  the 
preceding  year.  In  June,  1906,  there  were  fifty-two 
local  associations  that  were  affiliated  with  branches  of 
the  national  organization.  Every  section  of  the  country 
is  represented.  The  association  meets  annually,  and  the 
work  is  carried  on  chiefly  by  committees. 

The  scope  of  the  work  is  indicated  by  the  names  of 
the  standing  committees :  Membership  Committee,  Legis- 
lative Committee,  Business  Literature  Com- 
mittee, Committee  on  Improvement  of  Mer- 

7  .  r  _  nuttees. 

cantile  Agency  Service,  Committee  on  Credit 
Department  Methods,  Committee  on  Credit  Coopera- 
tion,  Committee  on   Adjustment  Bureaus,  Committee 

1  Monthly  Bulletin  of  the  National  Association  of  Credit  Men, 
July,  1905,  p.  24. 


228  MERCANTILE  CREDIT 

on  Investigation  and  Prosecution,  Committee  on  Fire 
Insurance,  Committee  on  Bankruptcy  Law,  Committee 
on  Banking  and  Currency,  Committee  on  Uniform 
Exemption  Laws,  Committee  on  Uniformity  of  State 
Laws,  on  Federal  Incorporation  Laws,  and  on  Commer- 
cial Arbitration. 

From  the  outset  the  National  Association  and  the 

local  associations  undertook  the  same  kind  of  work.     To 

interchange  information  in  regard  to  credit, 

Differen-      ^Q  majie  credit  men  more  intelligent,  and  to 
tiation  of  ....... 

work  of        improve  legislation  m  the  interest  of  credit 

national  men,  were  the  early  objects  sought.  Gradually 
and  local  plans  were  devised  to  place  the  organization 
tions  on  a  Droacler  basis,  and  new  standing  commit- 

tees were  organized.  Some  of  the  local  asso- 
ciations saw  that  their  effectiveness  would  be  increased 
and  enthusiasm  for  them  promoted  by  their  undertaking 
practical  work,  such  as  the  organization  of  adjustment 
bureaus  and  bureaus  for  the  exchange  of  credit  informa- 
tion. The  National  Association  has  come  to  see  that 
it  must  be  organized  on  a  broader  plan,  and  that  as  a 
recent  president  of  its  organization  has  said,  "It  must 
stand  for  the  general  improvement  of  credit  conditions, 
act  as  a  cement  force  between  its  various  local  organiza- 
tions devoted  to  the  ethical  phases  of  credit,  and  act  as 
an  educational  center  of  economic  problems."1  Although 
its  work  and  that  of  the  local  associations  overlap  some- 
what at  present,  the  tendency  is  for  each  local  association 

1  F.  W.  Standart :  Monthly  Bulletin  of  the  National  Association 
of  Credit  Men,  January,  1905.  D.  7. 


CREDIT  MEN'S  ASSOCIATION  229 

to  undertake  the  decidedly  practical  work  and  to  con- 
sider the  problems  of  credit  peculiar  to  its  locality.  The 
National  Association  is  limiting  itself  more  and  more  to 
the  general  problems  of  credit.  It  aims  to  supplement 
and  to  coordinate  the  work  of  the  local  associations  and 
to  cooperate  with  them  on  general  problems  such  as  those 
of  legislation.  There  is  still  a  Committee  of  the  National 
Association  on  Investigations  and  Prosecution,  but  its 
experience  seems  to  demonstrate  that  this  sort  of  work 
can  be  better  conducted  by  local  associations  where  they 
exist.  Here,  as  elsewhere,  the  National  Association  finds 
its  chief  efficiency  in  securing  the  cooperation  of  the 
various  local  bureaus  rather  than  in  undertaking  this 
sort  of  work  itself. 

The  most  effective  committees  have  been  the  following: 
Committee  on  Improvement  of  Mercantile  Agency 
Service,  Committee  on  Credit  Department  Methods, 
and  the  Legislative  Committee. 

From  the  outset  the  credit  men  manifested  a  desire  to 

cooperate  with  the  agencies  in  inducing  merchants  to 

make  better  reports.      From  the  beginning, 

the  National  Association  considered  as  one  of    work  of 

Com- 
the  chief  topics  the  inadequacy  of  the  agency    mittee  on 

reports,  with  the  result  that  at  some  of  the    Mercan- 

earlier  meetings,  representatives  of  the  Dun    tile 

A.£T6I1CV 

and  Bradstreet  agencies  were  present  to  de-    service 
fend  their  methods.     It  was  urged  that  signed 
statements  should  be  secured  from  the  merchant  in  all  in- 
stances when  possible,  and  that  if  the  latter  refused  and 
the  information  had  to  be  secured  otherwise,  this  fact 


230  MERCANTILE  CREDIT 

should  be  indicated  in  the  report  of  the  agency.  It 
was  asserted  that  agencies  ought  to  have  efficient  repor- 
torial  staffs  who  were  experts  in  dealing  with  business 
men  and  in  reporting  business  conditions;  that  a  search 
of  records  ought  to  be  made  in  every  instance,  and  that 
no  indefinite  reports  should  be  given;  that  all  ratings 
should  be  revised  at  least  every  six  months;  and  that 
new  information  should  be  furnished  promptly  on  re- 
quest; that  all  statements  should  be  carefully  tabulated. 
It  was  urged  that  a  large  number  of  the  reports  were 
written  by  men  in  various  communities,  usually  by  law- 
yers, who  relied  largely  on  hearsay  evidence,  and  that  the 
reports  in  no  way  indicated  the  sources  of  information. 
It  was  mantained  that  reports,  especially  in  country  dis- 
tricts, were  inaccurate  and  that  special  reports  were  re- 
ceived tardily.  In  all  cases  where  a  regular  reportorial 
staff  was  collecting  information,  it  was  said  to  consist  of 
an  inferior  set  of  men;  and  it  was  believed  that  much  of 
the  antipathy  of  business  men  for  the  agencies  and  the 
inadequacy  of  information  was  due  to  a  lack  of  tact  and 
diplomacy  on  the  part  of  the  reporters  of  the  agencies. 

The  agencies  looked  upon  the  claims  of  the  credit  men 
as  ideal  and  visionary.  The  latter  were  informed  that 
the  carrying  out  of  the  recommendations  here  suggested 
would  involve  a  very  great  expense,  and  that  the  receipts 
of  the  agencies  would  not  warrant  the  undertaking  of 
the  improvements  suggested. 

The  agitation  in  favor  of  a  higher  standard  had  an 
immediate  effect  in  improving  the  efficiency  of  the  agen- 
cies.    The  President  of  the  Bradstreet  agency  claimed 


CREDIT  MEN'S  ASSOCIATION  231 

that  in  1898  his  company  expended  $150,000  more  than 
in  former  years  in  improving  the  service  and  it  was  said 
that  extra  expenses  were  incurred  by  the  Dun  agency 
for  the  same  purpose.  According  to  these  agencies 
their  reports  were  secured  by  a  more  efficient  set 
of  men,  were  better  arranged  and  more  promptly 
rendered. 

The  Mercantile  Agency  Committee  has  compiled 
statistics  on  the  comparative  efficiency  of  the  Dun  and 
Bradstreet  companies,  covering  in  general  the  following 
points:  (1)  Average  time  between  asking  for  reports 
and  receiving  them;  (2)  average  age  of  the  first  report 
received;  (3)  percentage  of  reports  containing  signed 
statements  not  more  than  one  year  old;  (4)  the  prompt- 
ness of  reporting  changes;  (5)  arrangement  and  form; 
(6)  classification  of  reports  according  to  excellency  by 
districts.  These  data  were  furnished  by  the  local 
associations  and  the  members  of  the  National  Associa- 
tion. When  these  facts  were  first  published  they  at  once 
showed  the  comparative  efficiency  of  the  leading  agencies 
and  at  once  a  vigorous  rivalry  was  created.  So  long  as 
no  method  exists  to  show  definitely  the  comparative 
merits  of  rivals,  vigorous  competition  will  be  lacking; 
whereas  the  fixing  of  a  definite  standard  for  determining 
superiority  stimulates  efforts  to  excel  as  nothing  else  can. 

The  credit  men  claim  that  the  suggestions  made  to  the 
mercantile  agencies  have  received  consideration  and  that 
the  service  of  the  agencies  has  improved  in  every  way. 
The  feature  complained  of  most  frequently  at  present 
is  the  lack  of  accuracy  in  the  detailed  reports.     One  of 


232  MERCANTILE  CREDIT 

the  resolutions  presented  at  the  1905  meeting  and  passed 
unanimously,  was  "That  R.  G.  Dun  &  Co.  and  the 
Bradstreet  Co.  be  requested  to  discontinue  in  their 
reports  the  expression,  'He  is  the  reported  owner  of  real 
estate,'  etc.  The  ownership  of  real  property  is  a  matter 
not  of  supposition  but  of  fact,  and  therefore  easily  deter- 
mined; and  we  have  a  right  to  expect  that  they  will  search 
the  county  records  and  establish  the  facts  as  to  whether 
the  real  estate  referred  to  stands  on  record  in  the  name 
of  the  reputed  owner  or  some  one  else."  This  resolution 
indicates  the  feeling  of  the  credit  men  regarding  certain 
classes  of  the  reports  of  mercantile  agencies. 

The  Mercantile  Agency  Committee  has  endeavored  to 
secure  signed  statements  from  merchants  upon  uniform 
blank  sheets  made  out  by  the  committee.  To  this  end 
it  has  endeavored  to  prevail  upon  the  agencies  to  use 
its  signed  statements,  but  so  far  its  efforts  have  been 
unsuccessful.  Although  the  agencies  have  modified  the 
form  of  the  blanks  formerly  used,  they  have  been  unwill- 
ing to  adopt  those  suggested  by  the  credit  men.  As 
stated  above  the  signed  statement  has  many  features  to 
commend  it.  Although  statements  rendered  in  writing 
may  be  inaccurate,  they  are  as  a  rule,  much  more  truthful 
than  verbal  reports.  The  necessity  of  making  a  signed 
statement  leads  merchants  to  know  their  business  more 
accurately  and  to  keep  better  books.  A  signed  state- 
ment has  a  legal  significance.  The  merchant  who  makes 
a  signed  statement  does  so  with  a  view  to  secure  credit. 
If  his  statement  is  manifestly  false,  his  offense  comes 
under  the  head  of  securing  goods  under  false  pretenses, 


CREDIT  MEN'S  ASSOCIATION  233 

and  the  offender  is  criminally  liable.  So  in  all  cases 
where  preferences  are  allowed  and  the  bankrupt  has 
made  some  signed  statements,  the  advice  of  his  attorney- 
is,  invariably,  that  he  shall  take  care  of  such  creditors 
first. 

It  is  well  known  that  different  localities  have  different 
classes  of  agency  service.  Everything  depends  on  the 
efficiency  of  the  man  having  charge  of  the  territory.  In 
some  places  the  service  of  one  agency  is  far  superior  to  that 
of  the  other,  and  in  other  localities  there  verse  is  true. 
A  resolution  providing  for  the  continuance  of  the  investi- 
gation of  the  relative  merits  of  the  two  agencies,  and 
also  for  an  investigation  of  localities  where  each  is 
deficient,  was  passed  at  the  June  meeting,  1905.  Form  X 
shows  the  method  of  investigation  by  the  committee. 

Like  other  private  concerns  the  agencies  are  of  course 
interested  in  profits,  and  this  is  kept  in  mind  in  the  intro- 
duction of  improvements  in  service.  That  the  service 
rendered  is  not  all  that  is  desired  by  business  houses  is 
seen  in  the  tendency  of  large  wholesale  and  banking 
houses  to  employ  experts  whose  exclusive  duty  it  is  to 
investigate  customers  affairs  and  to  study  conditions 
which  directly  influence  credits.  In  doing  this  they  are 
limiting  their  agency  service  and  are  depending  more  and 
more  on  their  own  agents.  In  this  development  we  see  a 
tendency  to  return  to  conditions  which  existed  prior  to 
the  organization  of  the  agency  service.  How  far  this 
tendency  will  go  remains  to  be  seen. 

The  Committee  on  Credit  Department  Methods  has  la- 
bored from  the  outset  to  secure  the  adoption  of  uniform  in- 


234  MERCANTILE  CREDIT 

quiry  blanks  and  statement  blanks.     At  the  first  meet- 
ing, forms  were  proposed  and  sent  out  to  the  various  local 
associations  to  be  topics  for  discussion  at  the 

Work  of       meetings  in  1897.     Forms  were  adopted  at 
Com- 
mittee on     *ne  convention  of   1898  which  provided  for 

Credit  giving  the  creditor  a  clear  idea  of  the  standing 

Depart-  0f  debtors  and  were  sufficiently  binding  as  to 
Methods.  make  the  debtor  criminally  liable  in  case  of 
false  statement.  Much  is  gained  in  the  adop- 
tion of  a  single  form  or  report.  Merchants  are  not  con- 
fused by  having  different  kinds  of  reports  to  make  out; 
they  know  what  to  expect,  and  the  binding  nature  of 
the  report  becomes  generally  known.- 

At  present  the  Committee  on  Credit  Department 
Methods  manufactures  several  forms  of  property  state- 
ment blanks,  several  short  payment  forms,  a  trade  in- 
quiry blank,  and  unjust  discount  stickers.  These  are 
sold  to  members  and  others.  The  unjust  discount  sticker 
may  be  pasted  on  a  letter.  It  contains  this  statement: 
"Discount  for  cash  is  a  premium  for  prompt  payment 
within  the  time  and  upon  the  terms  as  agreed,  and  when 
not  earned  should  not  be  claimed.  Please  add  to  your 
next  remittance  $ "x 

It  soon  became  apparent  that  in  order  to  have  uniform- 
ity in  bankruptcy  legislation,  it  was  necessary  to  secure 
the  passage  of  a  national  law  instead  of  trying  to  bring 
about  uniformity  through  the  cooperation  of  the  various 
state  legislatures.     No  matter  what  the  skill  with  which 

1  Monthly  Bulletin  of  the  National  Association  of  Credit  Men, 
June,  1905  pp.  35,  36. 


Report 

without 
Statement 
:>r  with  one 
older  than 
one  year. 

Report 

with 

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as  to  Fire 

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Receipt. 

Number 
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ominine 
fractional 

months. 

Report 

Willi 

Statemenr 

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year  old. 

Report 
uitbout 

orwubone 
older  than 
one  year. 

Report 

with 

nlormati.m 

as  to  Fire 

Insurance. 

1 

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in    iho  onnL 

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CREDIT  MEN'S  ASSOCIATION 


235 


Associa- 
tion in- 
instru- 
mental in 
causing 
Bankrupcy 
Act  to  be 
passed. 


state  laws  were  drafted,  state  legislatures  could  always 
be  relied  upon  to  modify  the  laws  sufficiently  to  make 
the  legislation  of  the  various  states  diverse. 
On  this  account  the  National  Association  of 
Credit  Men,  as  well  as  most  of  the  local  asso- 
ciations, vigorously  supported  the  original 
Torry  bill  when  it  was  before  Congress,  and 
later  the  law  which  was  passed  in  1898.  The 
Legislative  committee  has  been  very  aggres- 
sive in  proposing  changes  in  the  law,  and  the 
amendments  which  have  been  passed  were  chiefly  due  to 
the  work  of  this  committee.  During  this  time,  however, 
the  interest  of  the  legislative  committee  in  procuring 
reforms  in  state  legislation  has  never  ceased. 

The  National  Committee  usually  works  in  cooperation 
with  the  state  associations  to  secure  local  legislation.  In 
all  instances  where  bad  laws  are  on  the  statute 
books,  cases  are  introduced  to  test  their 
constitutionality.  In  1896  the  New  Orleans 
Association,  with  the  consent  of  the  National 
Association,  took  charge  of  all  legislative 
questions  in  Alabama,  Arkansas,  Texas, 
Georgia,  the  Carolinas,  Mississippi,  Florida, 
and  Louisiana.  Two  laws  were  passed  by  the 
Louisiana  Legislature  in  1896.  The  laws  intro- 
duced in  Alabama  and  Arkansas  were  passed  in  1899. 
The  chief  reforms  in  state  legislation  prevented  the  sale 
of  goods  in  bulk,  and  prevented  preferences. 

When  the  Lodge  Bill  concerning  the  consular  service 
was  before  Congress,  the  Legislative  Committee  of  the  Na- 


Coopera- 
tion  of 
national 
and  local 
associa- 
tions in 
having 
state  laws 
passed. 


236  MERCANTILE  CREDIT 

tional  Association  labored  in  its  interest.    The  association 
at  its  June  meeting  passed  a  resolution  favoring  the  adop- 
tion of  this  law  or  another  containing  some  of  its 
Worked  .  .  _,  .  .  . 

for  provisions.     The  prominent  provisions  advo- 

consular  cated  were  an  improved  classification  and 
service  grading,  the  substitution  of  salaries  for  fees,  an 
increase  of  salaries,  the  application  of  the  merit 
system,  efficiency  as  a  test  for  continuance  in  office,  the 
Americanization  of  the  service,  and  the  requirement  that 
consuls  must  be  familiar  with  either  the  French,  German, 
Spanish  or  Chinese  languages,  and  "possess  a  knowledge 
of  the  natural,  industrial,  and  commercial  resources  of 
the  United  States." 

The  variations  in  the  provisions  of  the  homestead  and 
exemption  laws  of  the  various  states  have  caused  an 
Work  for  endless  amount  of  confusion  and  annoyance  to 
uniform  commercial  interests.  The  National  Associa- 
state  laws.  ^on  a^  ^s  meeting  in  1905  resolved  to  engage  in 
a  campaign  of  education  to  make  possible  more  uniform 
laws.  It  was  recommended  that  the  local  associations 
make  this  sub j  ect  a  feature  of  special  interest  in  the  follow- 
ing year.  The  National  Association,  through  the  Legisla- 
tive committee,  began  an  investigation  of  these  laws  with 
a  view  to  printing  them  to  show  their  lack  of  uniformity. 

Other  matters  which  engaged  the  attention  of  the 
Legislative  Committee  were  (1)  the  making  criminal  the 
Other  mailing  of  a  fraudulent  statement  concerning 

laws  to  one's  financial  condition  with  intent  to  de- 
prevent  fraud  by  securing  through  it  goods  or  money, 
and    (2)    the    enactment    of    laws    designed 


CREDIT  MEN'S  ASSOCIATION  237 

to  regulate  the  carrying  on  of  business  under  an  assumed 

or  fictitious  name. 

Nearly  all  the  laws  of  recent  years  providing  for  better 

relations  between  creditors  and  debtors  may  be  traced 

to  credit  men's  associations.     In  a  number     _  _ 

.  ...  Influence 

of  notable  instances  these  organizations  have    0f  credit 

failed  to  accomplish  their  objects.  How-  Men's  As- 
ever,  their  power  is  growing.  Statements  S0Ciatl0n 
made  by  Ex-president  Fessenden  of  the  New 
York  Credit  Men's  Association,  in  an  address  before 
that  organization  in  1899,  are  very  significant  for  that 
date.  "To-day  we  are  recognized,"  said  he,  "in  the 
city  and  in  the  state,  through  the  legislature,  as  a 
factor  to  be  consulted  in  all  proposed  laws  affecting 
merchandise  credits.  With  all  due  modesty,  yet 
with  full  confidence  in  what  I  declare,  I  say  to  you 
that  we  have  it  in  our  power  to-day  to  dictate 
what  bills  introduced  into  state  legislatures  shall  or 
shall  not  become  laws,  in  so  far  as  they  affect  us  credit 
men." 

The  Committee  on  Investigation  went  by  that  name 
until  the  annual  convention  of  1898  when  it  was  changed 
to  the  Committee  on  Investigation  and  Pros-  rnan„e  0* 
ecution.  Nearly  all  the  local  associations  investiga- 
have  similar  committees  and  as  a  rule  they  ^on  Com- 
work  in  cooperation  with  the  national  com- 
mittee. Cases  of  insolvency  are  investigated  and  when 
evidence  exists  to  show  that  there  has  been  a  fraudulent 
conversion  of  assets,  the  evidence  is  placed  with  a  prose- 
cuting attorney  and  the  merchant  is  prosecuted.     The 


238  MERCANTILE  CREDIT 

purpose  of  the  committee  is  not  to  make  collections  but 
to  prosecute  the  guilty. 

At  the  meeting  of  1898  a  series  of  resolutions  was 

passed  which  provided  for  the  employment  of  attorneys 

to   investigate   and    prosecute   frauds.     Pro- 

Prosecu-      visjon  was  a\so  made  for  urging  the  local 

uon  of  , 

fraud.  associations  to  report   to    the    Investigation 

Committee  of  the  National  Association  all 
cases  of  failure,  whether  fraudulent  or  not.  It  was 
made  the  duty  of  this  committee  to  investigate  the 
debtor's  commercial  record,  present  affairs,  capacity  and 
character  in  order  to  make  recommendations  to  the  in- 
volved creditors  as  to  a  reasonable  compromise  if  the 
debtor  was  honest,  and  as  to  the  extension  of  such  aid  as 
would  enable  the  debtor  to  continue  in  business. 

In  1899  after  the  national  bankruptcy  law  was  passed, 
a  plan  was  submitted  by  the  national  secretary  to  the 
local  associations  for  discussion  at  their  meetings.  The 
plan  provided  for  the  submission  of  all  offers  for  the 
compromise  of  indebtedness  to  the  Investigation  Com- 
mittee of  the  State  and  National  Associations,  and  cred- 
itors were  pledged  to  refuse  offers  of  compromise  until  the 
investigation  by  the  constituted  authorities  should  take 
place.  The  spirit  if  not  the  letter  of  this  plan  was  later 
carried  out.  A  fund  was  voted  to  be  used  in  the  investi- 
gation and  prosecution  of  fraud,  and  individual  credit- 
ors were  pledged  not  to  accept  compromise  offers  of 
settlement. 

The  difficulties  involved  in  carrying  on  the  work  of 
investigation  and  prosecution  by  the  National  Associa- 


CREDIT  MEN'S  ASSOCIATION  239 

tion  were  seen  to  be  almost  insurmountable  and  the 
Board  of  Directors  of  the  National  Association  at  their 
meeting  in  1903  decided  to  abandon  opera- 
tions  under   the  investigation  and  prosecu-    Prosecu~ 

tion 
tion  fund  as  far  as  new  cases  were  concerned.    Bureau. 

The  following  year,  however,  the  National 
Association,  instructed  the  directors  to  reorganize  the 
Investigation  and  Prosecution  Bureau  as  an  adjunct  to 
the  national  work,  and  recommended  "that  a  trust  fund 
of  $50,000  be  raised  with  which  to  equip  and  maintain 
the  bureau."1 

The  Secretary-Treasurer  immediately  sent  out  com- 
munications to  the  local  associations  to  obtain  opinions 
on  the  proposed  plan  with  reference  to  the  collection  of 
the  fund.  The  plan  suggested  did  not  meet  with  ap- 
proval of  the  local  associations,  and  the  board  of  directors 
at  its  next  meeting  decided  to  abandon  the  project. 
They  recommended  that  the  work  be  taken  up  by  the 
local  associations  in  their  respective  districts,  and  that 
the  costs  of  investigation  and  prosecution  be  borne  by 
the  association  or  associations  interested.  This  seems  to 
have  been  the  best  way  of  disposing  of  the  matter,  since 
the  local  associations  can  organize  much  more  effectively 
to  investigate  and  prosecute  cases  in  their  own  district 
than  a  committee  or  bureau  of  the  National  Association 
can  handle  the  cases  arising  in  all  parts  of  the  country — 
often,  indeed,  in  those  parts  with  which  they  are  but 
slightly  familiar. 

1  Resolution  of  National  Association,  1904.  Bulletin,  June 
19,  1905. 


240  MERCANTILE  CREDIT 

The  Committee  on  Credit  Cooperation  was  organized  in 
1904.  It  was  not  thought  advisable  to  establish  a  credit 
Credit  Co-  excnange  bureau,  but  it  was  considered  desir- 
operation  able  that  there  be  a  greater  interchange  of 
Com-  ledger  experience  among  members  of  the  As- 

sociation.  The  committee  appointed  limited 
itself  to  advocating  a  large  degree  of  interchange  of  in- 
formation, and  this  committee  was  retained  for  1905. 
Many  local  associations  and  many  trades  have  credit 
exchange  bureaus. 

The  Committee  on  Fire  Insurance  that  was  recently 
installed,  at  first  used  its  influence  to  induce  debtors  who 
Com-  ^ad  an  msumcient  amount  of  fire  insurance  to 

mittee  on  insure  themselves  adequately.  Since  then  it 
Fire  In-  has  prevailed  on  many  of  the  local  associations 
surance.  ^o  app0}n^  standing  committees  on  fire  insur- 
ance. At  the  National  Convention  of  Credit  Men  held 
in  Minneapolis  in  June,  1911,  the  Fire  Insurance  Com- 
mittee submitted  the  following  resolutions,  which  show 
clearly  the  position  of  this  committee  with  reference  to 
fire  insurance. 

"Resolved,  That  the  National  Association  of  Credit 
Men  in  convention  assembled,  recognizing  that  the 
present  conditions  of  fire  insurance  and  fire  waste  are 
imposing  an  unwarranted  and  unnecessary  burden 
upon  our  people,  makes  an  earnest  appeal  to  its 
members  and  particularly  its  affiliated  branches  to 
double  and  redouble  their  efforts  to  secure  relief  from 
these  conditions. 

"First,  by  using  every  means  at  hand,  and  especially  the 


CREDIT  MEN'S  ASSOCIATION  241 

literature  of  our  association,  to  give  the  public  in  general 
a  thorough  understanding  of  the  problems. 

"Second,  by  making  a  conscientious  study  of  local 
hazards  especially  as  cited  in  the  reports  on  cities  and 
towns  as  issued  by  the  engineers  of  the  National  Board 
of  Fire  Underwriters,  and,  acting  upon  them,  demanding 
of  the  municipal  authorities  that  such  hazards  be  reduced 
or  eliminated. 

"Third,  by  endeavoring  to  secure  in  every  state  the 
enactment  of  a  fire  marshal  measure  modeled  as  closely 
as  possible  upon  the  bill  as  introduced,  largely  through 
the  instance  of  this  association,  in  the  Legislature  of  the 
State  of  New  York. 

"Fourth,  by  keeping  in  touch  with  the  state  depart- 
ments formed  under  the  fire  marshal  laws  with  a  view  to 
securing  from  them  the  highest  possible  efficiency. 

"Fifth,  by  cooperating  with  other  organizations,  such 
as  state  fire  protection  associations  formed  to  reduce  the 
losses  of  their  respective  states." 

II.  LOCAL  ASSOCIATIONS  OF  CREDIT  MEN 

When  the  National  Association  of  Credit  Men  was 
formed  in  1896,  there  were  thirteen  local  associations 
of  credit  men.1  In  July,  1912,  there  were  ninety-one 
local  credit  men's  associations  affiliated  with  the  National 
Association  and  thirty-seven  states  were  represented. 

1  These  were  located  in  the  following  cities:  New  York,  Detroit, 
Cincinnati,  Sioux  City  (Iowa),  Portland  (Oregon),  St.  Joseph 
(Missouri),  St.  Louis,  Kansas  City,  Memphis,  New  Orleans, 
Louisville,  Nashville,  St.  Paul  and  Minneapolis. 


242  MERCANTILE  CREDIT 

The  purposes  of  the  early  associations  were  (1)  to 
reform  the  legislation  of  the  states  regarding  bankruptcy, 
(2)  to  prevent  creditors  from  being  defrauded,  (3)  to 
make  more  uniform  the  conditions  under  which  credit  is 
given,  (4)  to  increase  and  diffuse  knowledge  in  regard  to 
credit,  and  (5)  to  make  unity  of  action  possible  where 
the  interests  of  credit  men  were  involved.  The  progres- 
sive work  of  the  associations  was  done  by  the  committees. 
The  legislative  committees  were  especially  active. 
Laws  in  the  various  states  were  introduced  at  their  sug- 
gestion, and  through  cooperation  with  the  National  Asso- 
ciation of  Credit  Men,  a  campaign  was  begun  which  has 
tended  to  make  the  laws  of  the  various  states  more 
uniform. 

Most  of  the  local  associations  hold  several  meetings 
each  year,  some  as  often  as  once  a  month.  The  topics 
for  discussion  at  these  meetings  cover  a  wide  range.  They 
are  usually  those  of  immediate  interest  to  credit  men,  such 
as  The  Bulk  Sales  Law,  Corporation  Reports,  Credit 
System  in  Commercialism,  The  Adjustment  Bureau, 
Credits,  Credit  Exchange,  Law  for  the  Credit  Man,  The 
Bankruptcy  Act,  Mercantile  Agency  Service,  Collec- 
tions, Idealism  in  Business,  Systems  and  Methods  of 
handling  Accounts  and  Collections,  Fraudulent  Cases, 
The  Bankruptcy  Law  and  its  Repeal,  etc. 

Soon  after  some  of  the  local  credit  men's  associations 
were  formed,  plans  were  adopted  for  exchanging  credit 
information.  With  some  of  the  associations  the  credit 
clearing  house  work  became  a  prominent  feature.  Some 
have  organized  both  a  credit  exchange  bureau  and  an 


CREDIT  MEN'S  ASSOCIATION  243 

adjustment  bureau.  In  other  cases  the  Adjustment 
Bureau  work  has  been  introduced  without  a  Credit 
Exchange  Bureau.  When  the  Clearing  House  Bureau 
was  organized  as  a  part  of  the  work  of  the  association, 
the  exchange  of  credit  information  became  an  adopted 
policy. 


PART  II 

LEGISLATION 


CHAPTER  XV 
BANKRUPTCY  LEGISLATION 

The  right  to  contract  and  the  enforcement  of  contracts 
are  almost  as  old  as  the  race.    In  primitive  societies  public 
opinion  and  custom  compelled  the  enforce-    contracts 
ment  of  contracts.     They  cover  a  variety  of    of  primi- 
things,  but  usually  are  concerned  with  com-    tive 
mercial  agreements.     The  trade  relations  of  e* 

people  were  the  earliest  relations  between  families  and 
states.  Barter  was,  of  course,  the  earliest  form  of  the 
trade  relation.  When  the  buyer  did  not  have  goods  to 
exchange  for  the  commodities  of  the  seller,  he  gave  wam- 
pum, beads,  or  some  of  the  many  other  instruments  used 
by  primitive  people,  which  could  be  exchanged  by  the 
seller  for  goods  needed.  These  were  the  earliest  and 
crudest  forms  of  money.  When  the  medium  of  exchange 
did  not  exist  or  was  not  in  possession  of  the  buyer,  he 
agreed  to  deliver  goods  or  services  to  the  seller  as  a  com- 
pensation for  the  commodities  received.  This  was  the 
earliest  kind  of  contract.  It  had  the  sanction  of  the 
public  opinion  of  the  group  and  was  enforced  by  that 
sanction. 

When  political  organization  became  more  definite, 
states  prescribed  by  formal  laws  what  the  people 
should  do  and  should  not  do,  which  was  deemed 
imperative    to    the    welfare    of   the   states.      In    this 

247 


248  MERCANTILE  CREDIT 

development    of   state    activity   laws   governing   trade 
relations  were  everywhere  passed.     These  laws  always 

favored  the  creditor.  He  had  parted  with 
1  isla-  something  valuable  and  took  chances  on  a 
tion  with  loss  until  the  state  gave  him  some  redress. 
reference     ^o    protect    the     creditor    the    early    laws 

were  of  a  drastic  character.  At  that  time 
the  right  of  action  againt  the  debtor's  property  was 
of  less  significance  to  the  creditor  than  it  is  now. 
He  frequently  had  but  little  property,  and  the  sur- 
render of  the  person  of  the  debtor  either  for  his  im- 
prisonment or  for  the  taking  of  his  life  was  considered 
necessary  to  protect  the  interests  of  the  creditor.  All 
the  early  bankrupt  laws  provided  either  imprisonment 
for  the  debtor  or  the  death  penalty.  Until  the  nineteenth 
century  the  death  penalty  for  those  who  failed  to  pay 
their  debts  was  very  common. 

In  conformity  with  the  changes  in  industrial  organiza- 
tion in  modern  times,  and  especially  in  the  nine- 
teenth century,  the  relations  between  debtors  and  credi- 

,,  .  tors,  and  also  contract  relations,  have  changed. 

Modern 

views  with    The    spirit    of    commercial    interdependence 

reference  has  given  rise  to  the  idea  that  the  granter 
to  the  re-  Q£  cre(j}t  js  m  a  measure  a  partner  of  the 
between  debtor.  In  the  big  undertakings  of  the 
debtors  present  day,  business  cannot  be  carried  on 
and  #  without    borrowed    capital.     To    carry    on 

enterprises  and  to  develop  resources,  under- 
takers must  borrow  money.  In  lending,  the  creditor 
makes  an  investment  and  takes  chances  on  the  outcome. 


BANKRUPTCY  LEGISLATION  249 

He  inquires  into  the  character,  earning  ability,  etc.,  of 
the  borrower  and  makes  his  investment  based  upon  his 
investigations.  The  borrower  invests  the  capital  pro- 
cured in  an  enterprise  more  or  less  hazardous,  with  the 
hope  of  realizing  returns  which  are  roughly  in  proportion 
to  the  risks  of  the  undertaking.  In  new  countries 
investments  involving  great  risks  are  made  much  more 
frequently  than  in  older  countries,  and  interest  rates  are 
consequently  higher  since  they  cover  risks.  Great  busi- 
ness risks  are  necessary  to  the  rapid  development  of  a  new 
country,  and  often  the  rapidity  of  the  development  is  pro- 
portional to  the  degree  of  risk.  Although  many  succeed, 
a  great  many  fail,  and  those  who  succeed  render  impor- 
tant social  services.  Where  this  situation  prevails,  the 
honest  investor  who  has  been  unfortunate  cannot  be 
looked  upon  as  a  criminal.  The  creditor  who  considers 
the  nature  of  his  investment  and  who  accepts  a  high  rate 
of  interest  because  the  risk  is  hazardous,  has  no  special 
claim  in  equity  against  the  debtor  who  deals  honestly 
with  him  aside  from  the  surrender  for  the  creditor's  bene- 
fit of  the  property  of  the  debtor.  In  accordance  with 
this  conception  of  business  ethics,  which  became  pro- 
nounced in  the  early  half  of  the  last  century,  laws  were 
passed  in  England  and  America  dealing  leniently  with 
honest  debtors.  These  laws  first  prohibited  the  death 
penalty  and  imprisonment.  Then  they  held  the  bank- 
rupt responsible  in  debt  payment  for  only  the  amount 
of  property  which  he  possessed  at  the  time  of  his  failure. 
Any  other  legal  position  than  this  would  not  have  been 


250  MERCANTILE  CREDIT 

in  keeping  with  the  commercial  development  above 
described. 

Every  modern  state  regulates  by  bankruptcy  or  insol- 
vency laws  the  relations  between  creditors  and  their 
debtors  who  fail  to  pay  their  debts.  Ordi- 
Modern       narily  an  insolvent  is  one  who  cannot  pay  his 

ulate  debts  or  one  whose  liabilities  exceed  his  assets.1 
relations  Insolvency  is  necessary  to  bankruptcy  pro- 
between  ceedings.  In  some  countries,  France,  Austria, 
and  Germany,  a  stoppage  of  payments  results 
creditors,  necessarily  in  bankruptcy  proceedings.  In 
England,  Denmark,  Norway,  and  the  United 
States,  "Acts  of  bankruptcy"  are  necessary  to  bring 
about  an  adjustment  of  bankruptcy;  while  in  other 
countries  the  courts  must  determine  what  conditions  of 
the  cessation  of  the  payment  of  debts  will  result  in  bank- 
ruptcy proceedings.2  In  Belgium,  Italy,  and  Spain  the 
payment  of  debts  may  be  suspended  under  certain 
circumstances  without  the  debtors  going  into  bank- 
ruptcy. In  Italy  the  consent  of  a  majority  of  the 
creditors  is  necessary  for  a  suspension  of  payments. 
In  both  Belgium  and  Spain  debtors  are  allowed  to 
establish  with  creditors  compositions  which  forestall 
bankruptcy. 

In  all  the  southern  countries  of  Europe  except  Spain, 
bankrupt  laws  are  applicable  only  to  traders,  whereas  in 
the  northern  countries  of  Europe  and  in  the  United 
States  all  classes  of  debtors  are  subject  to  the  bankruptcy 

1  See  Lenthold :  Russiche  Rechtskunde,  Leipzig,  1879. 

2  Dunscombe:  Bankruptcy. 


BANKRUPTCY  LEGISLATION  251 

laws.      It  was  not  until  1881  that  Spain  established  a 
bankruptcy   law  for   traders    as    well    as    non-traders. 
As    early  bankruptcy  laws  were    drastic    in 
character,  the  privilege  of  bankruptcy  was  a    whicj1 
doubtful    one.      But   since    bankruptcy    has    bank- 
come  to  mean  a  cancellation  of  debts  if  the    ruptcy 

bankrupt  has  not  been  dishonest  and  if  he         , 

.  apply- 

surrenders  his   property,    the  trader  enjoys 

advantages  over  other  classes  in  countries  where  bank- 
ruptcy is  denied  to  nontraders,  since  there  the  latter 
class  must  pay  all  their  debts  in  full. 

In  all  countries  distinctions  are  made  with  reference 
to  causes  of  insolvency  based  upon  the  culpability  of  the 
debtor  who  goes  into  bankruptcy.     In  some    jn_ 
countries  notably  France,  Belgium,  Italy,  and    solvency, 
Switzerland,   a  distinction  is  made  between    simPle 
insolvency,  simple  bankruptcy,  and  fraudu-    ruDtcv 
lent    bankruptcy.     A    failure    without    any    fraudu- 
fraudulent  circumstances  attending  it,  is  an    lent  bank- 
insolvency.     Degree  of  guilt  is  recognized  as      up  cy" 
a  distinction  between  simple  bankruptcy  and  fraudulent 
bankruptcy,  for  each  of  which  offences  a  prison  sentence 
is  prescribed.     Such  offences  as  excessive  personal  ex- 
penses,   speculating   in    stocks,    giving    preferences    to 
creditors,  failing  to  keep  proper  books,  etc.,  are  recog- 
nized as  causes  of  simple  bankruptcy.     In  many  other 
countries  in  which  the  above  terms  are  not  used,  we 
find  similar  distinctions  in  which  the  treatment  of  the 
debtor  depends  upon  whether  or  not  he  was  guilty  of 
misconduct. 


252  MERCANTILE  CREDIT 

There  are  three  ways  in  which  bankruptcy  proceedings 
may  be  initiated:  (1)  by  declaration  of  the  debtor  him- 
T  .  .    .  self;  (2)  by  the  petition  of  one  or  more  cred- 

of  bank-      itors;  and  (3)  by  action  of  the  court  which 
ruptcy  has  jurisdiction.     In  some  countries  bankrupts 

pr0"  are  given  the  privilege  of  applying  for  a  judg- 

ment of  bankruptcy.  In  others,  as  soon 
as  the  debtor  is  unable  to  pay  his  debts,  it  is  made  his 
duty  to  make  known  the  condition  of  his  affairs.  The 
petition  of  the  debtor  is  an  act  of  bankruptcy  both  in 
England  and  the  United  States.  In  many  countries1 
any  creditor  regardless  of  the  amount  of  his  claim,  may 
place  a  debtor  in  bankruptcy  by  petition. 

In  most  countries  in  former  times  as  soon  as  bankruptcy 

proceedings  were  instituted  the  bankrupt  could  be  put 

in  prison.     Recently  the  rigor  of  these  laws 

Treatment    ^as  \Deen  lessened  and  imprisonment  is  re- 

of  debtor  .  . 

during         sorted  to  only  m  exceptional  cases.     In  all 

bank-  instances  the  declaration  of  bankruptcy  de- 

ruptcy  prives  the  debtor  of  the  possession  and  control 

ceedings.      °^  ^is  property,  until  his  relations  with  his 

creditors  have  been  adjusted.     Since  the  period 

of  becoming  insolvent  is  a  gradual  one,  the  time  at  which 

the  debtor's  control  of  his  property  must  cease  is  in 

nearly  all  countries  extended  back  beyond  the  time  of  the 

declaration  of  bankruptcy.     The  laws  and  practices  of 

countries  vary  greatly  on  this  point. 

In  the  adjudication  of  bankruptcy  a  court  of  compe- 
tent jurisdiction  has  charge  of  affairs.     In  the  various 

1  France,  Spain,  Italy,  Belgium,  Germany,  Austria  and  Hungary. 


BANKRUPTCY  LEGISLATION  253 

countries  this  court  appoints  trustees,  administrators, 
etc.,  to  take  control  of  affairs,  to  investigate  the  con- 
duct of  the  bankrupt,  to  take  charge  of  the    Banjj_ 
estate,  and  to  insure  to  each  creditor  his  valid    ruptcy 
claims.     Everywhere  an  assembly  of  creditors    Pro" 
is  given  privileges  and  rights  which  vary  with 
the  laws  of  the  country.     But  whatever  the  system  in 
vogue,  the  property  of  the  debtor  is  administered  and 
distributed  among  the  creditors  under  the  supervision  of 
the  court  that  has  charge  of  the  bankruptcy  proceed- 
ings.    In  the  closing  up  of  the  bankrupt's  affairs,  certain 
precautionary  measures  are  everywhere  employed.     An 
inventory  giving  a  full  description  of  the  bankrupt's 
property  and  an  estimate  of  its  value,  is  taken.     All 
creditors   must   prove   claims   against   the   estate.     To 
guard  against  the  misappropriation  of  funds,  the  admin- 
istrators are  held  responsible  for  misconduct  and  negli- 
gence; in  many  cases  they  are  required  to  give  bond,  and 
in  some  cases  the  funds  received  must  be  kept  in  a  public 
treasury. 

In  many  countries  the  ordinary  course  of  bankruptcy 
procedure  may  be  avoided  by  arrangements  between  the 
debtor  and  creditor,  known  as  compositions,  by  which 
they  themselves  agree  to  terms  of  settlement.  By  the 
composition  the  debtor  retains  or  is  restored  to  the  man- 
agement of  his  business  and  is  often  discharged  from  a 
portion  of  his  liabilities  when  he  carries  out  certain  stipu- 
lations. An  extension  of  time  to  meet  his  obligations  is 
sometimes  granted  the  debtor.  As  it  is  impossible  to 
secure  unanimity  of  action  among  creditors,  in  most 


254  MERCANTILE  CREDIT 

countries  a  majority  of  them  is  given  power  to  bind  the 

minority  in  making  compositions.     However,  a  double 

majority  is  required,  that  is,  numerically  and  in  assets 

varying  from  a  simple  majority  in  number  and  three-fifths 

in  value  as  in  Spain,  to  a  two-thirds  majority  in  number 

and  four-fifths  in  value  as  in  Hungary.     The  approval  of 

the  proper  judicial  authority  is  required  in  all  countries. 

The  method  of  discharge  is  different  in  England  from 

that  of  the  Continent.     On  the  Continent  the  court  must 

either  approve  or  reject  the  composition  agreed 

The  dis-      Upon  by  creditors.     It  has  no  right  to  modify 

charge  of  .  . 

debtor.         **,  nor  can  it  grant  a  debtor  the  privilege  of  a 

composition  on  his  own  motion.  In  England 
on  the  other  hand  the  court  may  discharge  a  debtor  from 
his  debts  after  he  has  paid  a  portion  of  them.  In  Eng- 
land Legislation  of  this  sort  more  lenient  to  debtors 
began  in  the  reign  of  Queen  Anne  and  culminated  in  the 
Acts  of  1883  and  1890. 

Within  the  last  fifty  years  what  is  known  as  Preventive 
Compositions  have  been  adopted  by  several  European 
pre_  countries  and  the  United  States.     They  are 

ventive  arrangements  entered  into  between  creditors 
com-  and  debtors  by  which  the  latter  avoids  going 

posi  ons.  though  bankruptcy  proceedings.  They  are 
intended  primarily  for  the  benefit  of  insolvent  debtors, 
but  are  beneficial  to  creditors  also.  When  the  debtor 
makes  a  request  for  the  privilege  of  entering  into  a  com- 
position with  his  creditors,  he  is  usually  required  to 
report  to  the  court  the  names  of  his  creditors,  their 
residences,  the  amounts  owed  each,  a  statement  of  his 


BANKRUPTCY  LEGISLATION  255 

assets,  and  a  proposition  for  composition.  While  nego- 
tiations are  pending,  the  debtor  cannot  transfer  any  por- 
tion of  his  property,  or  do  anything  which  will  affect  the 
condition  of  his  estate.  During  this  period  all  suits  and 
executions  against  the  debtor  are  suspended.  The  compo- 
sition must  be  agreed  to  by  a  majority  of  the  creditors, 
the  action  of  which  is  usually  binding  on  all  the  rest. 

The  first  English  law  providing  for  a  preventive  com- 
position; passed  in  1869,  placed  the  control  of  the  compo- 
sition almost  exclusively  in  the  hands  of  the  creditors 
and  debtor,  with  only  a  nominal  control  by  public 
authority.  The  clerk  of  the  court  was  required  to  register 
the  composition,  but  in  doing  this  his  power  was  restricted 
to  his  seeing  that  necessary  formalities  had  been  complied 
with.  This  Act  was  exceptional  in  legislation  of  this 
class,  for  the  negotiations  were  free  from  judicial  control 
and  the  agreements  entered  into  did  not  require  the  con- 
firmation of  a  court. 

The  laws  of  1883  and  1890  reversed  the  policy  of  the 
law  of  1869  by  giving  the  court  supervision  over  the 
negotiations  between  creditors  and  debtor,  by  making 
the  confirmation  of  the  court  necessary  to  the  validity 
of  agreements  between  them,  and  by  giving  the  court  the 
power  of  veto;  that  is,  of  refusing  to  approve  a  composi- 
tion when  it  seemed  that  the  interests  of  all  classes  war- 
ranted such  action.  In  all  the  Continental  countries, 
the  proper  court  exercises  supervision  over  composi- 
tions, and  the  confirmation  of  a  composition  is  necessary 
to  the  validity  of  an  agreement. 

In  most  countries  certain  civil,  commercial,  and  polit- 


256  MERCANTILE  CREDIT 

ical  rights  are  lost  to  debtors  through  bankruptcy  pro- 
ceedings.    European  countries  may  be  classified  in  three 

groups  with  reference  to  the  severity  of  bank- 
Treatment 
of  bank-      ruP*    laws:    (1)  In  France,  Belgium,  Spain, 

rupts  in        Italy,   and  the  Netherlands  the  debtor  must 

different       pay   ajj   ys   debts  m  fu\\  before  he  can  be 

restored  to  full  civil  rights;  (2)  in  Germany 
and  Austria,  as  a  rule,  the  debtor  is  restored  to  all 
his  rights  upon  the  conclusion  of  bankruptcy  proceed- 
ings; (3)  in  England  the  debtor  is  restored  to  all  his 
rights  when  he  is  discharged  by  the  court  and  a  certif- 
icate is  given  him  to  the  effect  that  his  insolvency  was 
due  to  misfortune.  He  is  also  freed  from  all  disabilities 
when  the  bankruptcy  is  annulled  after  it  has  been 
established  that  his  debts  have  been  paid  in  full. 

In  the  first  two  of  the  above  groups  there  are  many 
exceptions.  In  Spain  and  Italy  a  debtor  is  restored  to 
his  rights  when  a  composition  has  been  granted  and  all 
its  conditions  have  been  fulfilled.  In  the  Netherlands 
a  debtor  is  treated  similarly  if  he  has  acted  throughout 
in  good  faith.  In  France  and  Belgium  before  the  debtor 
can  be  restored  to  his  rights  he  is  required  to  pay  all  his 
debts,  even  those  from  which  he  has  been  excused  by  the 
terms  of  the  composition.  In  Spain  after  those  who  have 
obtained  a  composition  have  complied  with  its  condi- 
tions they  may  be  given  all  their  rights;  whereas  all 
other  bankrupts  must  pay  their  debts  in  full  to  obtain  the 
same  privileges.  As  a  rule,  fraudulent  conduct  prevents 
the  restoration  of  rights  to  a  bankrupt,  and  in  some  coun- 
tries the  fraudulent  are  punished  with  penal  servitude. 


CHAPTER  XVI 

THE  BANKRUPT  LAW  OF  1800 

Although  the  Constitution  of  the  United  States  has 

been  in  force  123  years,  in  but  thirty-one  years  have  we 

had  national  bankrupt  laws.     In  this  respect 

our  experience  has  been  different  from  that    WatjonaI 

bankrupt 
of  most  foreign  countries.     England  has  had    iaws 

a  bankruptcy  law  since  the  reign  of  Henry 
VIII,  her  last  Act  having  been  passed  in  1890.  Prac- 
tically all  other  European  countries  have  bankruptcy 
systems.  It  must  not  be  inferred,  however,  from  our 
experience  with  national  bankrupt  laws,  that  the  United 
States  is  opposed  to  bankruptcy  legislation.  Many  of 
the  states  have  insolvency  or  some  form  of  bankruptcy 
laws,  and  the  opponents  of  national  bankruptcy  legisla- 
tion in  Congress  have  usually  contended  that  this  class 
of  legislation  should  be  left  with  the  various  states. 

Authority  for  a  national  bankrupt  law  was  given  by  the 
following  clause  of  the  Eighth  Section  of  Article  I  of  the 
Constitution:  Congress  "shall  have  power  to    Right  to 
establish  a  uniform  rule  of  naturalization  and    legislate 
uniform  laws  on  the  subject  of  bankruptcy    on  bank" 
throughout  the  United  States."     The  changed    given  the 
attitude  in  favor  of  leniency  to  debtors  is  seen    national 

in  the  discussion  in  the  Constitutional  Con-    g°vern- 
i  ,i  •        i  «■»*        ment  by 

vention;  when  this   clause  came     up,      Mr.    the  con_ 

Sherman  observed  that  bankruptcies  were  in    stitution. 

257 


258  MERCANTILE  CREDIT 

some  cases  punishable  with  death  by  the  laws  of 
England;  and  he  did  not  choose  to  grant  a  power  by 
which  that  might  be  done  here."1  In  reply  Mr.  Gou- 
verneur  Morris  said  "that  this  was  an  extensive  and 
delicate  subject.  He  would  agree  to  it  because  he  saw 
no  danger  of  abuse  of  the  power  by  the  legislature  of 
the  United  States."2  Connecticut  was  the  only  state 
that  voted  in  the  negative  on  this  clause. 

That  the  interests  of  the  creditor  class  were  uppermost 
at  the  time,  however,  may  be  inferred  from  the  following 
clause  of  the  forty-second  number  of  the  Federalist 
written  by  Madison;  viz,  "The  power  of  establishing 
uniform  laws  of  bankruptcy  is  so  intimately  connected 
with  the  regulation  of  commerce,  and  will  prevent  so 
many  frauds  where  the  parties  or  their  property  lie,  or 
be  removed  into  different  states,  that  the  expediency  of 
it  seems  not  likely  to  be  drawn  in  question."  No  men- 
tion is  made  of  the  rights  of  debtors. 

The  issue  to  define  the  scope  of  Congress  in  legislation 

on  bankruptcy  was  first  drawn  between  the  strict  and 

e  t      loose  constructionists  of  the  Constitution,  the 

Scope  or 

legislation  former  claiming  that  the  powers  of  Congress 
°f  were  restricted  to  those  specially  granted  in 

Congress.     the    Constjtution#     ^hen    the    Constitution 

was  adopted,  the  bankruptcy  legislation  of  other  coun- 
tries was  limited  to  traders.     The  strict  constructionists 

1  Journal  of  the  Constitutional  Convention,  pp.  650-665- 
Madison. 

2  Journal  of  the  Constitutional  Convention,  pp.  650-665. 
Madison. 


THE  BANKRUPT  LAW  OF  1800  259 

consequently  claimed  that  the  clause  of  the  Constitution 
giving  Congress  the  right  to  pass  bankruptcy  laws  limited 
the  power  of  Congress  in  legislation  to  traders.  The 
Supreme  Court  has  since  settled  this  dispute  in  conform- 
ity with  loose  constructionist  theory  in  holding  that  the 
Constitution  granted  to  the  national  government  the 
right  to  legislate  in  bankruptcy  not  only  for  traders  but 
for  all  classes  of  business  men. 

The  depredations  made  on  our  commerce  by  Great 
Britain  and  France  prior  to  1800  disorganized  our  trade, 
and  both  debtor  and  creditor  classes  believed  Law  of 
that  it  would  be  to  their  mutual  interests  to  1800 
have  a  bankruptcy  act  passed  which  corre-  limited  to 
sponded  to  the  English  law.  It  was  in  com- 
pliance with  their  demands  that  the  first  National  Bank- 
ruptcy Act  was  passed  April  4,  1800.  The  Act  which 
was  limited  to  five  years,  was  an  involuntary  law;  that  is, 
action  to  make  a  man  a  bankrupt  had  to  be  brought  by 
creditors.  Like  the  English  law  and  other  bankrupt 
laws  of  the  time,  it  was  limited  to  traders — "merchants, 
traders,  bankers,  brokers,  factors,  and  insurers."  Other 
business  classes,  farmers,  mechanics,  laborers,  and  pro- 
fessional men  of  all  classes  were  excluded  from  its 
provisions. 

Two  principles  have  since  been  incorporated  into  the 
bankruptcy  or  insolvency  laws  of  the  most  progressive 
countries:  (1)  The  relief  of  the  honest  debtor    princjpies 
from  imprisonment;  and  (2)  The  cancellation    in  bank- 
of  the  debts  of  the  bankrupt  if  dishonesty  has    ruptcy 
not  been  proved,  and  if  his  property  has  been 


260  MERCANTILE  CREDIT 

surrendered  for  the  benefit  of  his  creditors.  The  first 
principle  has  usually  preceded  the  second.  Practically 
all  European  nations  of  to-day  have  accepted  the  first 
principle,  but  not  all  of  them  have  accepted  the  second 
principle.  In  England,  upon  the  other  hand,  the  dis- 
charge or  cancellation  of  the  debts  of  honest  bankrupts 
has  been  allowed  since  the  reign  of  Queen  Anne,  while 
freedom  from  imprisonment  was  made  possible  at  the 
beginning  of  the  nineteenth  century. 

A  distinction  has  been  made  as  to  kinds  of  business 
with  reference  to  the  culpability  of  the  man  failing. 
They  were  classified  from  the  point  of  view  of  hazard  and 
public  utility,  and  those  engaged  in  precarious  occupa- 
tions who  failed  were  treated  more  leniently  by  the  law 
than  those  failing  in  other  business  pursuits.  Under 
the  influence  of  the  mercantile  system,  international 
trade  was  considered  the  occupation  of  greatest  utility 
to  a  nation.  It  was  likewise  considered  the  most  hazard- 
ous enterprise.  Prior  to  the  nineteenth  century  all 
bankrupt  laws  in  England  related  to  traders,  and 
the  bankrupt  laws  of  most  of  the  countries  of  southern 
Europe  to-day  are  limited  to  traders.  The  mercantile 
teachings  with  reference  to  the  comparative  utility  of 
enterprises  had  nowhere  been  swept  away  by  1800. 
It  should  be  said,  too,  that  during  the  eighteenth  century 
trade  was  carried  on  under  hazardous  conditions.  Credit 
was  used  more  to  carry  on  trade  than  in  enterprises  of 
any  other  sort.  Large  amounts  of  capital  were  not 
needed  in  manufacture  until  the  industrial  revolution, 
and  the  development  of  agriculture  in  the  eighteenth 


THE  BANKRUPT  LAW  OF  1800  261 

century  was  not  dependent  upon  credit.  The  distinc- 
tion which  we  find  between  occupations,  by  the  laws  of 
the  period,  had  a  real  economic  basis  in  the  eighteenth 
century.  Views  to  this  effect  were  expressed  by  Mr. 
James  A.  Bayard  while  speaking  on  the  repeal  of  the  law 
of  1800,  on  February  18,  1803.  "The  most  diligent  and 
honorable  merchants  may  be  ruined  without  committing 
any  fault.  Not  so  as  to  the  other  classes  of  citizens; 
either  the  cultivators  of  the  soil,  the  mechanics,  or 
those  who  follow  a  liberal  profession.  They  live  on  the 
profits  of  their  labor,  not  on  profits  derived  from  credit." 
Blackstone1  in  his  commentaries  on  the  laws  of  Eng- 
land states  clearly  the  English  theory  with  reference 
to  bankruptcy  in  his  time.  Referring  to  the  _.  . 
laws  of  Rome  he  says  that  "The  laws  of  stone's 
England,  more  wisely,  have  steered  in  the    views  on 

middle  between  both  extremes;  providing  at    bank" 

ruptcy. 
once  against  the  inhumanity  of  the  creditor, 

who  is  not  suffered  to  confine  an  honest  bankrupt  after 
his  effects  are  delivered  up;  and  at  the  same  time  taking 
care  that  all  his  just  debts  shall  be  paid  so  far  as  the 
effects  will  extend.  But  still  they  are  cautious  of 
encouraging  prodigality  and  extravagance  by  this  in- 
dulgence to  debtors,  and  therefore  they  allow  the  benefits 
of  the  laws  of  bankruptcy  to  none  but  actual  traders; 
since  that  set  of  men  are,  generally  speaking,  the  only 
persons  liable  to  accidental  losses,  and  to  an  inability 
of  paying  their  debts,  without  any  fault  of  their  own. 

1  Blackstone's   Commentaries  on  Laws  of  England,   Book  2, 
Ch.  3,  p.  935,  Lewis's  edition. 


262  MERCANTILE  CREDIT 

If  persons  in  other  situations  of  life  run  in  debt  without 
the  power  of  payments,  they  must  take  the  consequences 
of  their  own  indiscretion,  even  though  they  meet  with 
sudden  accidents  that  may  reduce  their  fortunes;  for  the 
law  holds  it  to  be  an  unjustifiable  practice  for  any 
person  but  a  trader  to  encumber  himself  with  debts  of 
any  considerable  value.  If  a  gentleman  or  one  in  a 
liberal  profession  at  the  time  of  contracting  his  debts, 
has  a  sufficient  fund  to  pay  them,  the  delay  of  payment 
is  a  species  of  dishonesty,  and  a  temporary  injustice  to 
his  creditor;  and  if  at  such  time  he  has  no  sufficient  fund, 
the  dishonesty  and  injustice  is  the  greater.  He  cannot 
therefore  murmur,  if  he  suffers  the  punishment  which  he 
has  voluntarily  drawn  on  himself.  But  in  mercantile 
transactions  the  case  is  otherwise.  Trade  cannot  be 
carried  on  without  mutual  credit  on  both  sides:  the 
contracting  of  debts  is  therefore  here  not  only  justifiable 
but  necessary.  And  if  by  accidental  calamities,  as, 
by  the  loss  of  a  ship  in  a  tempest,  the  failure  of  brother 
traders,  or  by  the  non-payment  of  persons  out  of  trade,  a 
merchant  or  trader  becomes  incapable  of  discharging 
his  own  debts,  it  is  his  misfortune  and  not  his  fault. 
To  the  misfortunes  therefore  of  debtors,  the  law  has 
given  a  compassionate  remedy,  but  denied  it  to  their 
faults;  since,  at  the  time  that  it  provides  for  the  security 
of  commerce,  by  enacting  that  every  considerable  trader 
may  be  declared  a  bankrupt,  for  the  benefit  of  his  creditors 
as  well  as  himself,  it  has  also  (to  discourage  extravagance) 
declared  that  no  one  shall  be  capable  of  being  made  a 
bankrupt,  but  only  a  trader;  nor  capable  of  receiving 


THE  BANKRUPT  LAW  OF  1800  263 

the  full  benefit  of  the  statutes,  but  only  an  industrious 
trader."  Traders,  however,  were  not  benefited  by- 
bankruptcy  laws  until  provision  was  made  for  a  discharge 
which  involved  the  cancellation  of  their  debts  after  they 
surrendered  their  property  for  the  benefit  of  their 
creditors.  There  are  those  who  claim  that  bankruptcy 
laws  were  of  no  benefit  to  traders  until  they  included 
voluntary  provisions  making  it  possible  for  debtors 
to  invoke  the  laws  for  their  own  benefit.  However, 
American  experience  with  the  first  National  Bankrupt 
Act,  as  will  hereafter  be  seen,  tends  to  disprove  this 
contention. 

The  law  of  1800  was  restricted  to  merchants  and 
traders.  As  in  the  case  of  subsequent  American  bank- 
rupt laws  and  most  foreign  laws  of  a  similar 

character,  the  commission  by  a  debtor  of  acts    ,     °  could 

'  J  be  de- 

of  bankruptcy  was  necessary  to  his  adjudgment    ciared 

as  a  bankrupt.     From  a  general  point  of  view    bank- 
the  debtor  could  be  declared  a  bankrupt  when    ruPts  °y 
he  was  guilty  of  fraud,  or  when  he  exhibited  a    180o 
disinclination  to  pay  his  debts.     Specifically  a 
debtor  could  be  adjudged  a  bankrupt  for  the  commission 
of  any  one  of  the  following  offenses:  (1)  When  in  order  to 
defraud  his  creditors  he  left  the  state  where  he  usually 
resided;  (2)  when  he  concealed  himself  for  the  purpose  of 
fraud;  (3)  when  he  conveyed  his  property  for  fraudulent 
purposes;  (4)  when  he  preferred  creditors;  (5)  when  he 
willingly  and  fraudulently  permitted  himself  to  be  ar- 
rested; (6)  when  he  remained  in  prison  over  two  months 
or  when  he  escaped  from  it  for  purposes  of  fraud;     (7) 


264  MERCANTILE  CREDIT 

when  he  did  not  within  a  reasonable  time  make  provi- 
sion for  the  payment  of  his  debts  after  his  property  had 
been  attached. 

The  law  made  a  distinction  between  the  fraudulent 

bankrupt  and  the  debtor  guilty  of  bankruptcy  without 

fraudulent   intent.     A   debtor   could   be   ad- 

hf11  a  judged  a  fraudulent  bankrupt,  for  which  offense 
could  be  he  could  be  imprisoned  for  a  term  of  from  one 
adjudged  to  ten  years,  and  could  be  ever  afterward 
a  fraudu-  denieci  the  benefits  of  the  act  for  any  one  of  the 
rupt.  following  offenses :  (1)  Refusing,  within  forty- 

two  days  after  being  adjudged  a  bankrupt 
and  receiving  notice  of  the  execution  of  bankruptcy,  to 
surrender  himself  to  the  commissioners  of  the  bankrupt 
to  be  examined  by  them  with  reference  to  the  state  of 
his  affairs;  (2)  refusing  to  surrender  all  of  his  property 
to  the  commissioners  except  the  minimum  allowed  by  the 
Act;  (3)  testifying  falsely  with  reference  to  his  property, 
its  transfer,  etc.,  and  all  books,  papers,  etc.,  relating 
to  it;  and  (4)  upon  conviction  of  a  wilful  default.  If, 
while  being  examined  by  the  commissioners  of  bank- 
ruptcy, the  bankrupt  committed  "wilful  or  corrupt  per- 
jury, "  he  could  be  indicted  for  it,  and  was  made  subject 
to  imprisonment  for  a  term  of  from  two  to  ten  years. 

Upon  the  other  hand,  the  bankrupt  who  surrendered 
his  property  to  the  commissioners  to  be  divided  among 
his  creditors  and  who  gave  a  thorough  and  exact  report  of 
his  affairs,  should  be  discharged.  A  discharge  meant  not 
only  freedom  from  imprisonment,  but  a  cancellation  of 
all  the  debts  which  the  debtor  then  owed. 


THE  BANKRUPT  LAW  OF  1800  265 

The  judge  of  the  district  court  of  the  United  States 
had  charge  of  all  cases  of  bankruptcy  arising  in  the 
district.  The  petition  to  make  a  debtor  a  gank_ 
bankrupt  had  to  be  presented  to  him  by  a  ruptcy 
creditor,  who  was  required  to  give  bond  to  Pr0~ 
indemnify  the  alleged  bankrupt  for  damages  e  ings* 
in  case  bankruptcy  was  not  established.  When  the 
petition  was  filed,  it  became  the  duty  of  the  judge  to 
appoint  commissioners  residing  in  the  district,  not  to  ex- 
ceed three,  to  determine  on  the  question  of  bankruptcy 
and,  in  case  the  debtor  was  adjudged  a  bankrupt,  to  take 
charge  of  his  property.  When  notice  was  served  upon 
the  debtor,  summoning  him  to  appear  and  answer  the 
charge  of  bankruptcy,  it  was  his  privilege  to  demand  that 
a  jury  should  inquire  into  the  facts  of  the  case,  at  which 
time  the  judge  issuing  the  commission  should  preside. 
As  soon  as  the  debtor  was  declared  to  be  a  bankrupt,  the 
commissioners  should  appoint  a  time  and  place  for  the 
meeting  of  creditors,  at  which  time  they  were  required  to 
prove  their  debts  and  elect  an  assignee  or  assignees  to 
take  charge  of  the  debtor's  property.  As  soon  as  the 
assignee  was  elected  it  became  the  duty  of  the  com- 
mission to  transfer  to  the  assignees  all  the  property  of 
the  debtor,  except  the  minimum  allowed  by  law,  which 
was  of  a  personal  character.  The  commissioners  were 
also  authorized  to  recover  all  property  illegally  con- 
veyed or  concealed  and  to  place  it  in  the  hands  of  the 
assignees. 

After  four  months  and  within  twelve  months  of 
the  issuing  of  the  Commission  of  Bankruptcy,  the  assign- 


266  MERCANTILE  CREDIT 

ees  were  required1  to  appoint  a  place  of  meeting  of  the 
assignees,  commissioners,  and  creditors,  after  giving  thirty- 
days  notice.  At  this  meeting  accounts  were  to  be  bal- 
anced, and  the  property  of  the  debtor  was  to  be  divided 
among  the  creditors  in  proportion  to  the  claims  of  each. 
In  case  the  bankrupt's  entire  estate  was  not  divided  at 
the  first  meeting,  a  second  meeting  was  to  be  called  for 
the  distribution  of  the  remnant  of  it  within  eighteen 
months  after  the  Commission  was  issued.  The  allow- 
ances to  the  assignees  for  their  services  were  to  be  made 
by  the  commissioners,  but  "the  district  judges  in  each 
district  shall  fix  a  rate  of  allowance  to  be  made  to  the 
commissioners  of  bankruptcy."2 

The  only  property  of  the  bankrupt  which  was  not 
required  to  be  surrendered  were  the  clothing,  beds,  and 

_.  bedding  of  himself  and  family.     If  the  assets 

The 

amount  of    °f  the  bankrupt  paid  50  per  cent,  of  his  debts, 

property  then  he  was  allowed  5  per  cent,  of  the  net 
allowed  a  vaiue  0f  hjs  estate,  provided  that  this  amount 
did  not  exceed  $500.  If  his  estate  paid  75 
per  cent,  of  his  liabilities,  he  was  allowed  10  per  cent, 
of  the  proceeds  of  his  estate,  if  this  amount  did  not  ex- 
ceed $800.  But  if  the  assets  of  the  bankrupt  did  not 
pay  50  per  cent,  of  his  debts,  then  he  was  to  receive 
what  the  commissioners  would  allow,  the  amount  not  to 
exceed  $300  or  3  per  cent,  of  the  net  value  of  the  estate. 
If  the  bankrupt  was  not  proved  to  be  dishonest,  his  debts 
were  to  be  cancelled  after  his  estate  was  surrendered 

1  A  single  assignee  might  have  control  of  the  estate. 

2  Section  47. 


THE  BANKRUPT  LAW  OF  1800  267 

for  the  benefit  of  his  creditors.  The  bankrupt,  however, 
was  to  lose  all  title  to  the  allowance  of  a  portion  of  his 
property,  and  a  right  to  a  discharge  which  freed  him 
from  the  payment  of  the  balance  of  his  debts,  if  it  could 
be  proved  that  he  had  permitted  a  creditor  to  present 
a  fictitious  or  unfair  claim.  He  was  to  suffer  the  same 
penalty  if  he  had  lost  at  any  one  time  fifty  dollars,  or 
$300  in  all,  in  gaming  or  wagering.  A  bankrupt  who 
failed  a  second  time  could  be  relieved  from  punishment, 
but  he  could  not  be  discharged  from  the  payment  of 
all  his  debts,  unless  his  assets  paid  75  per  cent,  of  his 
obligations. 

In  one  sense  the  law  was  intended  as  an  experiment  as 
its  operation  was  limited  to  five  years.  However,  it 
was  repealed  December  19,  1803,  after  it  had  been  in 
force  somewhat  over  three  years.  The  vote  in  the 
Lower  House,  94  to  13,  showed  that  the  sentiment  there 
against  the  law  was  very  strong.1 

The  chief  arguments  for  the  retention  of  the  law,  were 
as  follows: 

1.  The  correct  policy  would  permit  the  law  to  expire 
by  its  own  limitation.     As  it  was  intended  as  an  experi- 
ment, five  years  should  be  allowed  to  test    Reasons 
its  value.     General  commercial   distress  de-    for  re- 
manded the  kind  of  law  which  was  passed  in    tainingthe 
1800.    Radical  amendments,  which  experience 

has  proved  necessary,  should  be  incorporated  in  the  law 
and  it  may  then  be  of  permanent  value. 

2.  Well-informed  writers  and  merchants  believe  that 
1  In  the  Senate  the  vote  in  favor  of  repeal  was    17  to  12. 


268  MERCANTILE  CREDIT 

more  privileges  should  be  given  to  men  engaged  in  trade 
than  in  other  callings.  The  exemption  of  property  from 
the  payment  of  just  debts  is  not  a  violation  of  justice  in 
certain  circumstances  in  the  case  of  commercial  concerns. 
Although  inability  to  pay  debts  ordinarily  results  from 
idleness  or  imprudence,  in  the  case  of  commerce  risks  are 
so  great  that  nothing  can  guard  against  failures. 

3.  Relief  to  unfortunate  worthy  traders  cannot  be 
granted  by  states,  since  their  laws  are  various  and  contra- 
dictory. Of  all  occupations,  trade  is  widest  in  range, 
and  laws  governing  trade  should  be  equally  wide  and 
extensive. 

4.  Credit  and  trade  are  the  chief  sources  of  wealth 
accumulation.  It  would  be  unwise  to  have  regulations 
which  would  hinder  their  natural  development. 

5.  The  bankrupt  law  did  not  always  operate  in  favor 
of  the  debtor,  as  the  opponents  of  the  law  claimed. 
Under  the  insolvent  laws  of  the  states  the  debtor  can 
determine  when  he  will  go  into  insolvency.  Under  the 
national  bankrupt  law  the  debtor  cannot  decide  when  he 
will  go  into  bankruptcy,  while  creditors  can  take  action 
to  stop  the  reckless  and  hazardous  career  of  a  debtor  by 
initiating  proceedings  to  make  him  a   bankrupt. 

6.  The  bankrupt  law  lessens  the  temptation  to  fraud 
since  there  is  less  opportunity  for  concealment  of  fraudu- 
lent conduct.  Moreover,  if  it  is  considered  desirable, 
state  legislatures  may,  without  violating  the  national  law, 
pass  laws  providing  drastic  treatment  for  fraud. 

7.  The  primary  purpose  in  providing  by  constitutional 
enactment  for  the  giving  of  power  to  the  national  govern- 


THE  BANKRUPT  LAW  OF  1800  269 

ment  to  pass  bankruptcy  laws,  was  to  establish  the  na- 
tional credit  upon  a  firmer  basis.  The  repeal  of  the 
law  will  mean  a  return  to  the  partial  and  inadequate 
system  of  the  states  with  reference  to  credit  and  debts. 

8.  If  the  law  was  retroactive  as  to  the  relations  be- 
tween debtors  and  creditors,  as  many  claim,  and  con- 
sequently injurious,  its  repeal  before  the  expiration  of 
five  years  will  change  again  the  relations  of  debtors  and 
creditors,  and  on  this  account  be  harmful. 

The  arguments  in  favor  of  the  repeal  of  the  law  were 
the  following: 

1.  As  Congress  was  responsible  for  the  evils  of  the 
law,  which  were  numerous,  it  would  be  wrong  to  permit 
the  law  to  expire  by  limitation.  Those  who  ordinarily 
try  to  avoid  bankruptcy  are  now  placing  themselves  in 
a  position  to  get  its  benefits. 

2.  The  bankrupt  law  had  a  bad  effect  on  the  morals  of 
the  mercantile  world;  it  created  credits  and  Arguments 
excited  a  spirit  of  extravagance  in  expenditure,    for  the 
The  opponents  of  the  law  pointed  out  that  as    repeal  of 
a  result  of  the  law  small  traders  were  often 

found  living  in  ease  and  great  luxury. 

3.  The  provisions  of  the  law  operated  in  favor  of  the 
debtor.  Although  the  commission  of  bankruptcy  was 
always  taken  out  at  the  instance  of  a  creditor,  it  was 
pointed  out  that  the  creditor  who  took  the  initiative  in 
most  instances  was  a  friend  of  the  debtor  who  acted 
under  his  guidance.  The  commission  of  fraud  led  to 
demoralizing  consequences. 

4.  The  bankrupt  law  could  not  be  carried  into  effect 


270  MERCANTILE  CREDIT 

successfully  without  a  resort  to  a  class  of  laws  to  prevent 
fraud,  passed  by  England  and  other  countries,  which 
were  so  drastic  in  character  as  to  be  abhorrent  to  our  code 
of  morals. 

5.  The  expenses  of  going  through  bankruptcy  were  out 
of  proportion  to  the  assets  to  be  divided,  owing  to  the 
high  fees  of  the  commissioners  and  assignees. 

6.  Trade  does  not  need  any  special  protection.  The 
commercial  world  is  always  fair  to  honest  debtors. 

7.  The  law  was  harmful  in  that  it  enlarged  the  powers 
of  the  federal  courts  and  of  the  general  government.  It 
was  claimed  that  many  powers  were  given  the  general 
government  by  the  Constitution  without  a  view  to  their 
exercise. 

8.  Of  most  weight  in  securing  the  repeal  of  the  law  was 
the  contention  that  it  was  partial  in  its  application,  since 
it  discriminated  in  favor  of  the  merchant  and  trader  to 
the  detriment  of  the  farmer  and  mechanic.  If  the 
merchant  failed,  he  could  be  relieved  from  the  payment  of 
all  his  debts,  whereas  if  the  farmer  or  mechanic  failed,  he 
was  under  obligation  to  cancel  every  item  of  his  indebted- 
ness. If  the  farmer  loaned  to  the  merchant  and  the  lat- 
ter failed,  the  farmer  was  then  unable  to  collect  a  part 
of  the  debts  due  him.  If  on  account  of  the  failure  of 
the  merchant  the  farmer  failed,  the  latter  was  afforded 
no  protection  whatever  by  the  law.  It  was  stated  that 
our  law  was  a  modified  form  of  the  English  law  at  that 
time,  and  it  was  argued  that  as  our  economic  conditions 
were  very  different  from  those  of  Great  Britain  a  good 
law  there  might  prove  to  be  a  very  poor  one  here.     There 


THE  BANKRUPT  LAW  OF  1800  271 

the  dominant  industry  was  commerce,  and  hence  the  legis- 
lative favoritism  to  the  mercantile  classes.  Here  the 
chief  industry  was  agriculture,  and  it  was  unjust  and 
detrimental  to  the  general  good  to  discriminate  against 
the  farming  class.  It  was  claimed  that  a  preferred  sys- 
tem that  treated  all  insolvents  alike  had  been  adopted 
by  some  of  the  states. 

9.  Of  importance,  secondary  only  to  the  last  argument, 
was  the  contention  that  while  justice  dictated  the 
liberation  of  the  body  of  the  bankrupt,  that  same  justice 
demanded  that  the  obligation  to  pay  just  debts  was 
eternal.  When  the  law  was  passed,  it  was  claimed  to  be 
retroactive  and  to  be  the  cause  of  great  harm  to  creditors 
by  enabling  debtors  to  be  discharged  from  the  payment 
of  obligations  incurred  before  the  passage  of  the  Act. 

The  clause  in  the  law  which  relieved  from  seizure  the 
property  acquired  by  the  bankrupt  after  he  was  dis- 
charged, arose  from  the  newer  credit  relations  and  was  in 
the  interests  of  the  public  welfare.  The  discharge  of  the 
debtor  formerly  meant  simply  relief  from  punishment. 
It  was  assumed  that  he  was  under  both  moral  and  legal 
obligations  to  pay  his  debts.  Relief  from  the  legal 
obligation  to  pay  was  looked  upon  by  many  as  the  be- 
stowal of  an  unwarranted  and  dangerous  favor.  It  was 
held  that  if  the  government  relieved  debtors  from  paying 
their  debts  in  full,  it  permitted  the  violation  of  contracts, 
and  that  its  effect  would  be  demoralizing.  It  was 
claimed  that  in  making  it  easy  for  the  debtor  to  go 
through  bankruptcy  proceedings,  by  which  a  portion  of 
his   debts  could  be  cancelled,   the  government  would 


272  MERCANTILE  CREDIT 

work  harm  upon  industry  since  carelessness  in  borrow- 
ing and  in  investing  would  result.  That  an  effective 
protest  should  be  made  against  the  release  of  the  honest 
bankrupt  from  the  payment  of  his  future  earnings  shows 
how  little  headway  our  modern  ideas  of  credit  and  busi- 
ness had  made  at  the  time. 


CHAPTER  XVII 

BANKRUPTCY  ACT  OF  1841 

The  second  National  Bankruptcy  Act  of  the  United 
States  was  passed  Aug.  18,  1841,  went  into  effect  Feb.  1, 

1842,  and  was  repealed  on  the  3rd  of  March, 

1843,  having  been  in  operation  slightly  over      gl  a 
thirteen   months.     Shortly    after    the    repeal    second 
of  the  law  of  1800,  agitation  was  begun  for  a    National 
new  bankruptcy  act.     Interest  in  such  a  law      ankruPt 
was  always  strongest  after  periods  of  depres-    whatpro- 
sion,  since  debtors  and  their  friends  were  par-    posed  Acts 
ticularly  vigilant  in  importuning  Congress  to    aimed  t0 
pass  a  bankruptcy  act  which  would  remove    pii^. 
the  burdens  from  the  former  class  and  permit 

them  to  begin  business  again.  Bankruptcy  Bills 
were  frequently  before  Congress,  but  the  friends  of  such 
measures  were  particularly  aggressive  in  1818,  1820, 
1822,  and  1826.  Most  of  these  measures  were  copied 
after  the  English  law  then  in  force,  and  all  the  friends  of 
the  measures  appealed  to  English  experience  to  prove  the 
need  of  such  a  law  here.  In  nearly  all  cases  the  proposed 
measures  limited  the  benefits  of  the  law  to  traders,  and  in 
most  cases  they  were  involuntary  measures.  All  of 
them  proposed  three  things:  1.  The  surrender  of  the 
property  of  the  debtor  for  the  benefit  of  his  creditors;  2. 
the  relief  of  the  debtor  from  punishment  if  dishonesty 

273 


274  MERCANTILE  CREDIT 

had  not  been  proved;  3.  the  discharge  of  the  debtor 
from  the  obligation  to  pay  his  debts.  In  all  these  dis- 
cussions, the  State  Rights"  advocates  were  strongly- 
opposed  to  a  national  bankrupt  act,  whereas  in  general 
the  loose  constructionists  favored  such  a  law. 

It  was  urged  that  the  trader  or  merchant  ought  to  be 
governed  by  a  different  set  of  rules  than  that  governing 
farmers,  mechanics,  wage-earners,  professional  men,  etc. 

The  business  of  the  traders  and  merchants  is 

traders         more  speculative  and  hazardous  than  that  of 

were  the  latter  classes  and  in  the  nature  of  things 

made  a         must  be  so.     With  the  former  it  was  claimed 

f  that  failure  is  frequently  due  to  misfortune 

and  miscalculation;  and,  where  this  is  true, 
the  welfare  of  both  the  state  and  the  creditor  class  as 
well  as  that  of  the  debtors  demands  the  discharge  of 
the  debtor,  a  thing  which  relieves  his  future  earnings 
from  attachment  to  pay  his  debts. 

In  the  discussion  in  the  House  in  1822,  it  was  pointed 
out  that  the  first  Bankruptcy  Act  of  England  was  passed 

in  the  reign  of   Henry  VIII;  that  this  Act 

oreign        then  remained  in  force  through  all  political 
expen-  .  °  c 

ence.  an(^  industrial  vicissitudes;  and  that  the  only 

changes  which  were  made  in  it  consisted  in 
lessening  the  rigor  of  the  law  with  reference  to  debtors. 
Other  nations  had  bankruptcy  laws  with  varying  degrees 
of  severity.  The  chief  difference  between  them  con- 
sisted in  the  required  proportion  and  number  of  creditors 
whose  opinion,  in  regard  to  the  effects  of  the  debtor, 
should  control  and  bind  the  rest. 


BANKRUPTCY  ACT  OF  1841  275 

In  1819  a  report  was  made  by  the  chancellor  and 
judges  of  the  Supreme  Court  of  New  York  to  the  Legisla- 
ture of  that  state  on  its  insolvency  law.     This    „ 

New 
body  reviewed  the  insolvency  legislation  of    York's 

New  York  beginning  with  the  law  of  1784.    experience 

It  commented  favorably  on  the  Act  of  1813,    withinso1- 

vent  lfl.ws« 
which    required    every    insolvent    debtor    to 

make  application  for  relief  in  the  county  where  he  resided 
or  was  imprisoned.  It  was  pointed  out  that  the  insolvent 
law  in  New  York  was  intended  to  relieve  the  debtor 
from  the  payment  of  his  debts  and  to  free  him  from 
imprisonment  after  he  had  surrendered  his  property  for 
the  benefit  of  his  creditors.  At  this  time,  in  New  York, 
those  not  free  holders  charged  with  small  debts  could  not 
be  imprisoned  for  a  longer  period  than  60  days;  and  any 
one  owing  debts  less  than  $500  might  be  discharged, 
whereas  if  one  owed  debts  larger  in  amount,  an  appli- 
cation for  a  discharge  must  be  made.  This  committee 
recommended  the  repeal  of  the  State  Insolvency  Law, 
claiming  that  a  National  Bankrupt  Act  would  be  superior 
to  the  insolvency  laws  of  the  states. 

It  was  claimed  that  commercial  interests  were  in  need 
of  a  law  to  keep  the  debtor  "in  failing  circumstances, 
from  disposing  of  his  property  partially  among 
his  creditors,  or  from  fraudulently  wasting  it,      fUrPi°Se,. 
or    converting    it    to    his    own    use."1     The    rupt  iaw# 
preservation  of  the  debtor's  estate  and  its 
protection  in  the  interests  of  the  creditors  were  to  be  the 
chief  factors  in  a  national  bankrupt  law  if  this  committee 

1  Niles  Register,  Vol.  16,  p.  85,  Sup. 


276  MERCANTILE  CREDIT 

had  the  making  of  the  law.     It  was  held  moreover  that 

a  permanent  law  to  relieve  debtors  would  be  demoralizing. 

The  chief  argument  for  a  bankrupt  Act  at  this  time 

was   that  the    act  would   discharge   debtors  who  had 

become  involved  in  debt  owing  to  extravagant 

Reasons       speculation  and  the  unsettled  industrial  con- 
assigned         .  .  . 
for  pass-      ditions.     It  was  claimed  that  the  Embargo, 

ing  a  Non-intercourse  Acts,  and  the  War  of  1812-14 

bankrupt      jja(j   ruine(j   thousands.     After   the   war   the 

Act  in  .  - 

1822.  opening  up  of  new  lands  with  the  attending 

land  speculation,  and  the  unsettled  banking 
and  monetary  situation  of  the  country,  had  caused  many 
more  to  fail.  Many  of  these  were  not  fraudulently 
culpable,  it  was  argued,  but  were  simply  unfortunate; 
and  for  this  reason  their  debts  should  be  cancelled  and 
they  should  be  permitted  to  start  in  business  again. 
Commercial  prosperity  and  even  the  interest  of  the 
creditors  themselves  demanded  this. 

The  arguments  of  the  opposition,  however,  at  this 
time  prevailed.  They  argued  that  the  cancellation  of 
Arguments  debts  would  violate  contracts  and  the  effect 
of  those  would  be  demoralizing.  They  insisted  that 
opposed  to  such  a  law  would  be  an  invitation  to  conduct 
hazardous  enterprises  and  then  repudiate 
just  debts  in  case  of  business  failure.  They  claimed 
that  the  industrial  conditions  in  England  were  so  different 
from  those  in  America  that  a  good  law  there  might  be 
a  very  poor  one  here,  and  that  it  was  unwise  to  follow 
the  English  precedent.  Some  claimed  that  the  bank- 
ruptcy legislation  in  England  was  a  failure.     Quotations 


BANKRUPTCY  ACT  OF  1841  277 

were  made  from  the  report  of  the  English  commission  of 
bankruptcy  of  1818  to  show  this.  The  English  law  was 
limited  to  traders,  but  by  a  loose  construction  of  the 
law  it  was  extended  to  many  other  classes.  It  was 
pointed  out  that  it  would  be  impossible  to  tell  who 
were  traders  and  who  were  not.  If  the  proposed  law 
included  others  than  the  trading  class,  it  would  demoral- 
ize those  who  had  absolutely  no  need  for  a  bankruptcy 
law.  The  law  before  Congress  in  1822  contained  a  clause 
extending  the  provisions  of  bankruptcy  to  "other  per- 
sons actually  using  the  trade  of  merchandise,  by  buying 
and  selling,  in  gross  or  retail."1  It  was  claimed  that  this 
clause  would  include  the  miller  who  converts  wheat 
into  flour,  and  the  distiller  who  purchases  grain  for 
manufacturing  purposes,  and  many  others  who  would 
not  logically  belong  to  the  merchant  or  trading  class. 
In  1827  another  Act  was  introduced  to  include  farmers 
within  the  provisions  of  the  law.  The  influence  of  the 
law  on  the  farmer  in  withdrawing  him  from  his  regular 
occupation  and  tempting  him  into  the  questionable 
occupation  of  speculation  in  lands  and  other  fields  for 
which  he  had  no  qualifications,  was  dwelt  on  at  consider- 
able length.  Between  the  repeal  of  the  law  of  1800  and 
the  passage  of  its  successor  in  1841,  important  decisions 
were  made  by  the  courts  affecting  bankruptcy,  deci- 
sions which  determined  in  large  measure  the  subsequent 
course  of  legislation  on  bankruptcy. 

Those  who  were  opposed  to  the  extension  of  power 
by  the  United  States  Government  saw  in  the  enactment 

1  Abridged  Debates,  House,  Vol.  7,  p.  280. 


278  MERCANTILE  CREDIT 

of  a  national  bankrupt  law  another  encroachment  of 
the  federal  power  on  the  prerogatives  of  the  states. 
Since  the  insolvent  laws  of  the  states  were  in 
Arguments  force  so  long  as  there  was  no  national  bank- 
of  those  rUp£  jaw^  an(j  smce  ^  latter  abolished  them 
opposed  to  .  . 

extension      where  the  provisions  of  these  laws  were  m 

of  power       conflict   with   the   national   law,    the   States 
by  the  Rights  advocates  viewed  national  legislation 

Govern-       on  bankruptcy  with  much  concern.     It  was 
ment.  argued    that    without    a   national   bankrupt 

law  the  federal  courts  are  chiefly  concerned 
with  the  settlement  of  controversies  between  citizens  of 
the  different  states.  One  debater  claimed  that  the 
national  law  would  effect  a  judicial  consolidation  of 
the  Union,  and  would  introduce  radical  changes  in  the 
relations  between  the  state  and  federal  courts.  This 
contention,  however,  proved  to  be  unfounded. 

It  was  pointed  out  that  a  national  law  would  impose 
heavy  burdens  on  both  debtors  and  creditors  in  attend- 
ing the  federal  courts.     At  this  time,  North 
Inconvcn.™ 
ience  of        Carolina  constituted  but  one  federal  district; 

attending  consequently  all  the  citizens  of  the  state 
federal  would  be  required  to  attend  the  same  bank- 
ruptcy court.  Pennsylvania  was  divided  into 
two  districts,  the  sessions  of  each  court  being  held  at 
Philadelphia  and  Pittsburg,  cities  300  miles  apart. 
Under  modern  conditions  with  many  railways  and  fast 
trains,  a  burden  almost  unbearable  would  be  imposed  on 
people  to  go  the  distance  required  of  residents  of  those 
districts  at  that  time.     But  in  the  early  twenties  there 


BANKRUPTCY  ACT  OF  1841  279 

were  no  railways  anywhere,  and  the  highways  over 
which  the  people  would  have  to  travel  were  in  such  a 
condition  as  to  make  attendance  at  these  courts  for 
the  great  majority  of  them,  wholly  impracticable. 
These  facts  were  pointed  out  in  these  discussions,  and 
they  furnished  the  chief  reasons  for  the  defeat  of  the 
proposed  laws. 

The  friends  of  these  measures  claimed  that  the  clause 
requiring  the  consent  of  two-thirds  of  the  creditors 
for  the  distribution  of  the  estate  of  the  debtor  and  for 
his  subsequent  discharge,  adequately  safeguarded  the 
interests  of  the  creditors.  The  opponents  of  these  laws 
claimed  that  this  clause  offered  no  safeguard  whatever; 
that  the  remoteness  of  the  federal  courts  from  the  places 
of  business  of  most  of  the  creditors  would  prevent  them 
from  attending  its  sessions,  and  that  the  discharge  of  the 
debtor  and  the  cancellation  of  his  debts,  would  be 
made  relatively  easy.  It  was  thus  claimed  that  while 
these  measures  pretended  to  give  adequate  protection 
to  the  creditors,  this  protection  was  only  apparent  and 
not  real.  However,  the  arguments  of  the  advocates  of 
a  national  bankrupt  law  proved  unavailing  until  after 
the  crisis  of  1837. 

The  right  of  a  state  to  legislate  on  bankruptcy  when 
a  national  law  is  in  force,  and  the  distinction  between 
insolvency  and  bankruptcy  laws  and  the  right  of  a  state 
to  grant  a  discharge  to  a  debtor  when  debts  were  owed 
a  creditor  in  another  state,  were  frequently  mooted 
questions.  The  first  two  of  these  were  answered  by  the 
Supreme  Court  of  the  United  States  in  1819,  through 


280  MERCANTILE  CREDIT 

Chief  Justice   John   Marshall   in   the   famous   case   of 

Sturgis  vs.  Crowninshield.1 

On  the  first  proposition  the  court  held  that  "The  rights 

of  the  states  to  pass  bankrupt  laws  are  not  extinguished 

by  the  enactment  of  a  uniform  bankrupt  law 

Court  deci-  throughout  the  Union  by  Congress,  for  they  are 

sions  on       suspended  only  so  far  as  the  two  laws  conflict. 

bankrupt      States  are  not  forbidden  to  pass  such  laws. 

.  ,  It  is  simply  a  question  of  the  exercise  of  such 

vent  laws.  ^  J       n 

power  by  Congress."  State  laws  have  always 
been  effective  during  the  absence  of  a  national  law. 
When  a  national  law  is  passed,  they  cease  to  be  operative 
but  go  into  effect  again  when  the  national  law  is  repealed. 
State  laws  on  bankruptcy  not  in  violation  of  the  national 
law  are  also  held  to  be  valid  by  this  decision. 

With  reference  to  the  second  proposition  it  was  gen- 
erally assumed  that  an  insolvent  law  dealt  with  the  per- 
son of  the  bankrupt,  and  the  bankrupt  laws  dealt  with 
his  property.  It  was  also  held  that  insolvent  laws  are 
enforced  by  debtors,  and  bankrupt  laws  by  the  creditors. 
The  decision  of  the  Chief  Justice  on  these  points  is 
as  follows:2  "But  if  an  act  of  Congress  should  dis- 
charge the  person  of  the  bankrupt,  and  leave  his  future 
acquisitions  liable  to  his  creditors,  we  should  feel  much 
hesitation  in  saying  that  this  was  an  insolvent,  and 
not  a  bankrupt  act;  and  therefore  unconstitutional. 
Another  distinction  has  been  stated,  and  has  been  uni- 
formly observed.     Insolvent  laws  operate  at  the  instance 

1  Sturgis  vs.  Crowninshield,  4,  Wheaton,  122. 

2  Sturgis  vs.  Crowninshield,  4,  Wheaton,  122. 


BANKRUPTCY  ACT  OF  1841  281 

of  an  imprisoned  debtor;  bankrupt  laws  operate  at  the 
instance  of  a  creditor.  But  should  an  act  of  Congress 
authorize  a  commission  of  bankruptcy  to  issue  on  the 
application  of  a  debtor,  a  court  would  scarcely  be 
warranted  in  saying  that  the  law  was  unconstitutional, 
and  the  commission  a  nullity."  This  decision  of  the 
Chief  Justice  shows  clearly  that  there  is  no  necessary 
distinction  between  an  insolvent  and  a  bankrupt  law, 
based  either  upon  provision  of  the  law  or  the  conditions 
of  its  enforcement.  This  decision  established  also  the 
constitutionality  of  a  voluntary  bankrupt  law. 

The  third  proposition  in  dispute,  the  right  of  a  state 
insolvency  law  to  discharge  a  debtor  from  obligations 
owed  citizens  of  another  state,  was  settled  by  the  case 
Ogden  vs.  Saunders  brought  before  the  Supreme  Court  in 
1827.  *  The  decision  established  clearly  two  points: 
First,  the  right  of  a  state  to  discharge  by  an  insolvency 
law,  a  debtor  from  obligations  owed  citizens  if  con- 
tracted subsequently  to  the  passage  of  the  law;  and 
second,  the  unconstitutionality  of  an  insolvency  law 
which  discharges  a  debtor  from  obligations  owed  in 
another  state,  or  contracted  prior  to  the  enactment  of 
the  law. 

In  1837  and  for  several  succeeding  years,  the  country 
was  visited  by  an  industrial  depression  far  more  serious 
than  any  that  preceded  it.     This  was  due  to 
a  variety  of  causes,  prominent  among  which    , ™  * 
were  the  over-speculation  in  lands  and  other 
securities,  an  inferior  monetary  system,  the  adoption  of 

1  Ogden  vs.  Saunders,  12,  Wheaton,  213. 


282  MERCANTILE  CREDIT 

the  policy  by  the  government,  with  but  little  warning, 
that  payment  for  government  lands  had  to  be  made  in 
specie,  and  the  failure  of  crops  in  the  United  States  in 
1835,  1837,  and  1838.  Thousands  of  people  in  all  walks 
of  life  failed,  and  recuperation  from  the  panic  was  ex- 
ceedingly slow. 

All  the  arguments  for  a  national  bankrupt  law  which 

would  cancel  the  obligations  of  debtors  heretofore  made 

after  periods  of  temporary  distress,  were  now 

The  Act  of  repeateci  with  great  vigor.  Finally  after  a 
1841  was      ,  l  ,  ,  f  „         °  ,  .  ,     , 

passed.         long  an0-  heated  discussion  in  which  charges 

were  made  bordering  on  corruption,  the  bill 
passed  both  Houses  of  Congress  and  was  signed  by  the 
President,  August  19,  1841.  The  measure  at  first  con- 
tained a  provision  requiring  the  Act  to  go  into  operation 
shortly  after  its  passage.  This  feature  was  amended  so  as 
to  postpone  the  time  for  it  to  go  into  effect  until  Febru- 
ary 1,  of  the  following  year,  with  the  result  that  an  un- 
successful attempt  was  made  to  repeal  the  law  before 
it  went  into  operation.  The  bill  was  passed  at  an  extra 
session,  and  Congress  had  convened  again  before  the  Act 
became  a  law. 

This  Act  provided  for  voluntary  as  well  as  involuntary 
bankruptcy.     Any  one  could  become  a  voluntary  bank- 
rupt who  owed  debts  not  "created  as  a  conse- 
Provisions 
of  Act.  quence  of  a  defalcation  as  a  public  officer,  or 

Voluntary     while  acting  in  a  judiciary  capacity  as  execu- 

bank-  ^QT^  administrator,  guardian,  or  trustee,"  and 

who  conformed  to  certain  definite  conditions 

laid  down  by  the  law.     He  was  required  to  make  a  list 


BANKRUPTCY  ACT  OF  1841  283 

of  his  creditors,  give  their  residence,  state  the  amounts 
owed  each,  furnish  an  inventory  of  all  of  his  property 
and  state  its  location.  After  he  had  furnished  these 
statements  under  oath,  together  with  a  declaration  of 
his  inability  to  pay  his  debts,  the  court  was  empowered 
to  declare  him  a  bankrupt. 

The  voluntary  feature  of  the  law  was  new  in  our  legis- 
lation and  met  with  great  opposition.  It  was  modeled 
after  the  English  law  of  1827,  which  provided  for  volun- 
tary bankruptcy.1  It  was  pointed  out  in  the  discussion 
in  Congress  that  voluntary  bankruptcy  prevailed  in 
England  long  before  the  passage  of  her  so-called  volun- 
tary Act;  and  that  at  this  time  England  legalized  what 
had  long  been  the  custom  there  under  involuntary 
bankruptcy.  A  failing  debtor  would  arrange  with  a 
friendly  creditor  to  commit  an  act  of  bankruptcy  and 
have  the  creditor  bring  suit  in  bankruptcy.  By  this 
method  it  was  within  the  power  of  debtors  to  determine 
when  and  how  they  could  become  bankrupts  without  a 
voluntary  law.  The  friends  of  voluntary  bankruptcy 
claimed  that  what  had  been  the  custom  there  could  be 
practised  here,  and  that  no  new  or  extraordinary  privi- 
leges were  given  debtors  by  the  Voluntary  Bankrupt  Act. 

The  law  of  1841  limited  involuntary  bankruptcy  to 
the    merchant    class — including    "merchants,    bankers, 
factors,    brokers,    underwriters,    and    marine   involun- 
insurers,  who  owed  debts  to  the  amount  of   tary  bank- 
$2,000  and  were  guilty  of  fraud."     The  peti-  Tnptc7' 
tion  of  one  or  more  creditors  to  whom  not  less  than 

1  Abridged  Debates,  Vol.  14,  p.  713. 


284  MERCANTILE  CREDIT 

$500  was  owed,  was  adequate  to  make  a  debtor  a 
bankrupt.  The  commission  of  any  one  of  the  following 
offenses  would  make  a  debtor  an  involuntary  bankrupt: 
(1)  To  depart  from  the  state  with  intent  to  defraud 
creditors;  (2)  to  conceal  himself  to  avoid  arrest  or  to  have 
himself  fraudulently  arrested  or  to  have  his  goods  taken 
fraudulently  in  execution;  (3)  to  conceal  or  to  remove  his 
goods  to  keep  them  from  being  detached  or  taken  in 
execution;  (4)  to  make  a  fraudulent  conveyance.  When 
a  person  was  declared  to  be  a  bankrupt  under  these 
conditions,  upon  petition  to  the  court  he  was  entitled  to  a 
trial  within  ten  days  to  determine  the  facts  of  bankruptcy. 
If  the  bankrupt  lived  a  great  distance  from  the  place 
where  the  court  was  held,  the  court  might  at  its  discre- 
tion, have  the  bankruptcy  proceedings  held  in  the  county 
where  the  bankrupt  resided.  This  feature  was  incor- 
porated into  the  Act  partly  to  meet  the  objections  of 
those  who  insisted  that  a  National  Act  imposed  heavy 
and  unnecessary  burdens  on  those  who  were  compelled  to 
travel  long  distances  to  attend  the  federal  courts. 

Transfers  or  conveyances  of  property  for  the  purpose 
of  preferring  creditors  were  violations  of  this  Act.  All 
Prefer-  payments  or  transfers  made  to  those  not  bona 
ences.  fide  creditors  or  purchasers  were  considered 

Penalties.  fraudulent  acts.  In  these  cases  it  was  made 
the  duty  of  the  assignee  to  recover  property  fraudulently 
conveyed  as  assets  of  the  bankrupt.  The  bankrupt 
guilty  of  the  above  frauds  was  to  be  refused  a  dis- 
charge in  bankruptcy.  All  dealings  and  transactions  of 
a  bona  fide  character  made  by  the  debtor   more   than 


BANKRUPTCY  ACT  OF  1841  285 

two  months  before  the  petition  to  make  him  a  bank- 
rupt was  filed,  were  not  invalidated  by  this  Act  if  the 
other  party  to  these  dealings  had  no  knowledge  of  a 
prior  Act  of  bankruptcy  or  of  the  intention  of  the 
debtor  to  take  advantage  of  the  bankrupt  Act.  If  a 
voluntary  bankrupt  preferred  a  creditor  subsequent  to 
the  first  of  January  preceding  the  passage  of  the  Act 
he  could  not  be  discharged  unless  a  majority  of  his 
creditors  who  had  not  been  preferred,  gave  their  con- 
sent to  his  discharge. 

After  the  petition  of  bankruptcy  was  filed  it  was  the 
duty  of  the  court  to  appoint  an  assignee  who  should  take 
control  of  the  property  and  property  rights 
of  the  bankrupt.     The  assignee  was  required    ment  0f 
to  make  sales,  transfers,  etc.,  as  the  court    assignees. 

ordered.     All    moneys   received   were   to   be    Tneir 

duties* 
transferred  to  the  court  within  sixty  days  after 

their  collection.  A  division  of  the  assets  among  cred- 
itors was  to  be  made  as  often  as  once  every  six  months. 
The  assignee  was  given  power  to  redeem  mortgages  or 
other  pledges  and  to  collect  all  moneys  owed  the  bank- 
rupt. For  the  purpose  of  closing  estates  as  early  as 
possible  the  court  could  require  the  assignee  to  reduce 
the  property  of  the  bankrupt  to  money  and  to  divide  it  as 
early  as  was  possible  in  the  interests  of  the  creditors. 
It  was  provided  that  there  should  be  exempted  from 

seizure  "  the  necessary  household  and  kitchen 

r  .  Exemp- 

furmture,"  and  such  other  articles  and  neces-       tions 

saries  as  the  assignee  having  reference  to  the 

circumstances     of     the    bankrupt    should     designate, 


286  MERCANTILE  CREDIT 

but  altogether  not  to  exceed  the  sum  of  $300.     The 

wearing  apparel  of  such  bankrupt,  and  that  of  his  wife 

and  children  were  also  to  be  exempted. 

The   bankrupt   who   surrendered    his    property    and 

carried  out  the  orders  and  directions  of  the  court  and 

_ .    ,  was  not  guilty  of  fraud,  was  entitled  to  a  full 

Discharge.  , 

discharge  by  the  court  unless  a  majority  in 

number  and  in  value  of  his  creditors  who  had  proved 
their  debts  had  filed  written  objections  to  it.  The  dis- 
charge and  certificate  of  discharge  could  not  be  granted 
until  the  court  published  in  a  newspaper  for  seventy  days 
a  notice  to  all  creditors  to  appear  at  a  particular  time  and 
place  and  show  reason  why  a  discharge  should  not  be 
given.  The  court  might,  if  it  chose,  notify  creditors 
personally  if  they  lived  a  long  distance  from  where  the 
sessions  of  the  court  were  held. 

The  opponents  of  the  law  seriously  objected  to  this 
feature.  They  claimed  that  in  every  country  where  a 
bankrupt  law  was  in  force,  the  consent  of  from  one-half 
to  four-fifths  of  the  creditors  in  number  and  amounts 
owed,  was  necessary  to  a  discharge.  In  the  above  named 
provision  the  debtor  could  be  discharged  unless  over  one- 
half  of  his  creditors  objected  to  it;  and  the  method  of 
informing  creditors  of  the  application  for  a  discharge 
was  not  such  as  would  insure  the  enlightenment  of  a 
very  large  percentage  of  them  on  the  action  taken  by 
the  debtor. 

Debtors  guilty  of  fraud  as  defined  in  the  Act  could  not 
be  discharged.  Involuntary  bankrupts  who  failed  to 
keep  proper  books  could  not  be  discharged.     When  a 


BANKRUPTCY  ACT  OF  1841  287 

discharge  was  refused  by  the  court  on  account  of  ob- 
jections of  creditors  or  because  of  fraud,  the  bankrupt 
might,  if  he  petitioned  within  ten  days,  appeal  the  case 
to  the  next  circuit  court  and  demand  a  trial  by  a  jury. 
When  once  discharged  a  debtor  could  not  be  discharged 
a  second  time  unless  his  assets  paid  75  per  cent,  of  his 
debts. 

The  District  Court  in  every  district,  had  jurisdiction 
over  bankrupt  cases.     Petitions  in  bankruptcy  were  to 
be  made  to  the  District  Court  where  the  bank-    courts 
rupt  resided.     After  the  petition,  notices  of    having 
it  were  to  be  published  by  the  court  in  one    jurisdic- 
or  more  newspapers  of  the  district   at  least 
twenty    days    before    the    hearing.     At    this    meeting 
creditors   had  to  establish  their  claims.     The   Circuit 
Court  within  the  district  had  concurrent  jurisdiction 
with  the  District  Courts  in  all  suits  brought  by  the  as- 
signee with  reference  to  the  bankrupt  estate  or  by  any 
one  else  against  the  assignee.     All  suits  to  be  valid  had 
to  be  brought  within   two   years   after  the   decree   of 
bankruptcy. 

The  preference  feature  was  introduced  in  this  Act. 
In  the  distribution  of  the  assets  of  the  debtor,  the  follow- 
ing debts  were  preferred  in  the  order  named: 

(1)  Debts  due  to  the  United  States;  (2)  debts    Who  were 

preferred 
due  the  sureties  of  a   debtor;   (3)   wages  of    debtors. 

laborers  not  to  exceed  $25  for  services  per- 
formed within  six  months  of  the  bankruptcy  of  the  em- 
ployer.    It  was  claimed  in  the  House  that  one  of  the 
purposes  of  the  law  was  to  treat  all  creditors  alike,  and 


288  MERCANTILE  CREDIT 

that  in  preferring  certain  creditors  its  fundamental 
purpose  was  defeated.  It  was  insisted  also  that  it  was 
unfair  to  others  to  make  the  United  States  Government 
a  preferred  creditor. 

Since  the  Act  was  passed  in  the  summer  of  1841  at  a 
special  session,  and  since  it  was  not  to  be  enforced  until 
February  1,  1842,  ample  opportunity  was  given  to  re- 
peal it  before  it  went  into  effect.  It  was  claimed  that 
on  one  day  it  was  laid  on  the  table  by  a  majority  of  11, 
and  the  following  day  after  a  night  when  the  wine  flowed 
freely,  it  was  taken  from  the  table  and  passed.  It  was 
claimed  also  that  the  friends  of  the  bankruptcy  Act 
held  up  the  Land  Distribution  Bill  and  prevented  the 
passage  of  the  latter  act  until  after  the  former  had  been 
passed.  The  unsuccessful  attempt  to  repeal  the  law 
before  it  went  into  operation  did  not  hinder  its  opponents 
from  beginning  an  early  campaign  for  its  repeal.  They 
felt  that  the  experiences  of  the  summer  and  early  au- 
tumn in  which  hundreds  of  those  who  were  insolvent 
went  through  bankruptcy  proceedings,  would  win  to 
their  side  many  of  those  who  had  been  in  sympathy 
with  the  law.  The  undue  haste  in  taking  advantage 
of  the  law's  voluntary  features  and  in  insisting  on  a  dis- 
charge from  debts,  was  responsible  for  the  change  in 
sentiment. 

The  constitutionality  of  the  law  again  concerned  the 
members  of  Congress.  The  chief  points  of  attack  in  this 
regard  were  its  voluntary  and  retroactive  features.  The 
law  was  objected  to  in  these  respects,  not  only  on  con- 
stitutional grounds,  but  in  the  interests  of  public  policy. 


BANKRUPTCY  ACT  OF  1841  289 

It  was  argued  that  the  law  was  unconstitutional  on 
account  of  its  retroactive  features.     One  senator  (Ben- 
ton of  Missouri)  argued  that  the  discharge  of 
a   debtor   without   the   consent   of   creditors    that  t^e 
or  a  certain  percentage  of  them  was  unconsti-    law  was 

tutional,  and  was  not  the  practice  of  any  of    unconstl- 

....  ,       ,       tutional. 

the  progressive  countries  which  have  bank- 
ruptcy laws.  The  same  authority  held  that  the  volun- 
tary provisions  interfered  with  the  insolvency  laws  of 
the  states  and  was  on  this  account,  unconstitutional. 
It  was  claimed  that  the  Constitution  of  the  United  States 
gave  Congress  the  power  to  pass  bankruptcy  and  not 
insolvency  laws.  It  was  also  claimed  that  the  right  of 
states  to  pass  lien  laws  was  paramount  and  this  right 
was  prohibited  by  the  National  Act. 

On  the  other  hand,  it  was  argued  that  it  was  too  nar- 
row a  construction  of  the  Constitution  to  limit  the  power 
of  Congress  in  bankruptcy  legislation  to  the  kind  of  a 
law  England  had  when  the  Federal  Constitution  was 
adopted.  A  progressive  state  would  allow  some  elas- 
ticity in  legislating  under  the  Constitution.  It  was  also 
maintained  that  one  cannot  draw  a  hard  and  fast  line 
between  an  insolvent  and  a  bankrupt  law.  In  general,  an 
insolvent  law  discharges  the  person  of  a  debtor  only,  while 
a  bankruptcy  law  is  more  general,  and  may  not  only  dis- 
charge the  person  of  a  bankrupt  but  also  free  him  from 
the  payment  of  his  debts  after  he  has  surrendered  all  his 
property  to  pay  his  debts.  It  was  also  asserted  that  the 
legal  requirement  for  the  consent  of  a  majority  of  cred- 
itors in  number  and  in  value  to  discharge  a  debtor,  was 


290  MERCANTILE  CREDIT 

unnecessary  from  a  constitutional  point  of  view.  These 
arguments  on  the  constitutionality  of  the  bankrupt  law 
were  made  in  apparent  ignorance  of  the  Supreme  Court 
decisions  above  referred  to. 

Some  of  the  opponents  of  the  law  insisted  that  it 
had  been  responsible  for  all  kinds  of  injustice,  ine- 
quality, and  fraud  and  for  these  reasons  it  should  be 
repealed  as  soon  as  possible.  It  was  maintained  that 
many  who  had  heretofore  been  solvent  were  ruined  by  re- 
lieving their  debtors  from  the  liability  to  pay  their  debts. 

Those  who  opposed  the  repeal  of  the  law  held  that 

its   evils    could    be    traced    chiefly    to    its    retroactive 

features.     Some   claimed  that  it   should   be 

r!°g  amended  by  repealing  its  voluntary  provi- 

sions. Others  argued  with  a  great  deal  of 
wisdom  that  the  worst  evils  of  the  law  had  already  been 
experienced,  and  that  if  it  were  repealed  now,  the  chief 
sufferers  would  be  those  who  were  made  insolvent  by 
the  undue  haste  with  which  their  debtors  went  through 
the  bankruptcy  court,  and  who  were  consequently  reduced 
to  bankruptcy  by  the  la  w  itself. *  The  opponents  of  repeal 
contended  that  these  people  should  now  be  given  a  fair 
chance  to  secure  the  benefits  of  the  Bankruptcy  Act 
themselves.  It  was  claimed  that  at  this  time  the  law 
would  be  administered  primarily  with  respect  to  prospec- 
tive cases,  those  with  which  the  law  should  ultimately 
deal.  It  was  held,  moreover,  that  those  who  would  vote 
to  repeal  the  law  would  be  responsible  for  future  retroac- 
tive legislation  with  all  the  abuses  which  such  legislation 

1  See  address,  Buchanan  of  Pennsylvania,  A.  D.,  Vol.  14,  p.  713. 


BANKRUPTCY  ACT  OF  1841  291 

entails.     The  sentiment  favoring  repeal  was  too  strong 

at  this  time,  and  no  argument  could  withstand  it. 

The  preamble1  to  the  bill  providing  for  the  repeal 

of  the  law  introduced  in  the  Senate  by  Mr.  Benton  on 

December    7,  is    as  follows:    "Whereas    the       _ 

Repeal. 
Bankrupt  Act  of  1841  is  unconstitutional  and 

immoral,  and  violates  the  rights  of  the  states  and  of 

individuals,  and  is  invalid  and  void,  and  ought  not  to  be 

permitted  to  remain  on  the  Statute-book." 

The  bill  which  passed  the  House  permitted  the  cases 
which  were  pending  to  take  their  course  under  the  law.2 
"The  repeal  shall  not  extend  to  or  affect  any       D> 
case  which,  at  the  time  this  Act  goes  into      tion  of 
effect,  shall  be  pending  before  any  court;  nor      pending 
to  any  proceeding  which,  at  said  time,  shall      cases- 
have  been  in  progress,  under  and  by  virtue  of  the  said 
Act  hereby  repealed."3     The  motion  to  repeal  passed  the 
House  by  a  vote  of  140  to  71. 

When  the  House  bill  went  to  the  Senate,  a  motion  was 
offered  by  Senator  Benton  striking  out  the  above  section 
which  permitted  all  bankruptcy  cases  pending  when 
the  Act  was  repealed,  to  be  settled  in  accordance  with  the 
law.  His  amendment  substituted  certain  clauses  that 
were  in  the  Senate  bill  he  introduced,  clauses  that  fol- 
lowed closely  the  methods  of  closing  estates  provided 
by  the  law  of  1800. 

1  Benton's  speech,  A.  D.,  Vol.  14,  p.  610. 

2  Abridged  Debates,  Vol.  14,  p.  658. 

3  Prior  to  this  vote  a  motion  to  amend  the  Bankruptcy  Act  by 
repealing  the  voluntary  features  was  defeated  by  a  vote  of  136 
to  73. 


292  MERCANTILE  CREDIT 

These  required  the  consent  of  two-thirds  of  one's 
creditors  for  a  discharge,  that  the  insolvent  laws  and  the 
lien  laws  of  the  states  remain  in  force,  that  a  person 
subject  to  involuntary  bankruptcy  should  not  have  the 
privilege  of  voluntary  bankruptcy,  and  that  the  opera- 
tions of  the  law  be  prospective  only.  In  the  discussion 
it  was  claimed  that  the  amendment  requiring  changes  in 
legal  procedure  for  pending  cases  would  cause  a  great 
deal  of  confusion,  and  that  the  repeal  of  the  law  which 
they  thought  was  imperative  at  this  time  would  be  de- 
layed and  would  possibly  be  defeated  by  the  fact  that 
the  law  was  sent  back  to  the  House.  The  amendment 
was  defeated  and  the  House  bill  was  passed  by  a  vote 
of  32  to  13.  The  law  was  repealed  with  the  exception 
that  cases  already  pending  were  to  be  settled  according 
to  the  provisions  of  the  law. 


CHAPTER  XVIII 
BANKRUPTCY  ACT  OF  1867 

For  twenty-four  years  after  the  repeal  of  the  National 
Bankruptcy  Act  in  1843  the  country  was  without  a 
bankruptcy  law.  Within  this  period  the  Agitation 
friends  of  National  bankruptcy  legislation  for  a  third 
had  before  Congress  various  bills,  all  of  which  bankrupt 
were  rejected.  A  National  Bankruptcy  Act 
was  on  the  program  of  the  Pierce  Administration  in 
1853.  In  1864  an  unsuccessful  effort  was  made  by 
Congressman  Thomas  A.  Jenckes  of  Rhode  Island,  a 
champion  of  bankruptcy  legislation  to  secure  the  passage 
of  a  law.  Since  the  sentiment  favorable  to  such  legis- 
lation is  always  strongest  after  periods  of  industrial 
depression,  the  settled  conviction  was  reached  at  the 
close  of  the  Civil  War  that  the  time  for  a  National 
Bankruptcy  Act  had  arrived.  The  debates  on  this 
subject  in  Congress  in  1866-67  show  that  the  form  of 
the  Act  was  the  only  subject  in  question. 

The  first  Bill  introduced  in  the  House  after  the  war, 

was  defeated  March  28,  1866,  by  a  vote  of  73  to  59. 

However,  a  motion  to  reconsider  the  measure     .  .     , 

A  bank- 
was  soon  afterward  passed  by  a  vote  of  83    rupt 

to    45.     This    measure    provided    for    both    measure 
involuntary  and  voluntary  bankruptcy,  and    defeated 
according  to  its  provisions  a  large  body  of 
marshals  and  other  officers  were  required  to  enforce  the 

293 


294  MERCANTILE  CREDIT 

law.  This  latter  feature  was  objectionable  to  many, 
others  opposed  the  extension  of  the  involuntary  provi- 
sions to  all  classes,  and  still  others  objected  to  the  laws 
retroactive  features.  It  was  claimed  in  the  debate  that  if 
the  proposed  Bill  became  a  law  a  "swarm  of  office  holders 
would  swoop  down  on  the  estates  of  bankrupts,  and  noth- 
ing would  be  left  for  the  creditors."1  The  same  speaker 
insisted  that  Congress  was  not  asked  for  a  compulsory 
Bankrupt  Act,  and  that  it  would  be  a  great  injustice  to 
inflict  compulsory  bankruptcy  on  mechanics  and  farmers. 
Congress  was  asked  to  pass  a  law  to  relieve  unfortunate 
debtors  from  the  obligation  of  paying  their  debts  with 

future  earnings,  since  a  provision  for  this  pur- 
Should  the  p0Se  was  considered  of  paramount  importance, 
laws  of  the  ^e  H°use  was  at  first  opposed  to  any  inter- 
states  be  ference  with  the  exemption  laws  of  the  states, 
abolished  which  as  they  stood  left  the  debtor  a  mini- 
B  &kr  ^  mum  amount  of  property  after  going  through 
Act?  insolvency  proceedings.     On  this  subject  the 

Senate  and  House  clashed.  It  was  claimed 
in  the  House  that  contracts  between  debtors  and  credi- 
tors were  made  with  a  full  knowledge  of  the  exemption 
laws  of  the  states,  and  that  no  harm  could  come  to  a 
creditor  if  these  laws  of  the  states  were  observed  in  the 
National  Bankruptcy  Act.  It  was  argued,  moreover, 
that  the  national  government  did  not  have  the  consti- 
tutional right  to  set  aside  the  exemption  laws  of  the 
states.     In  the  Senate  it  was  held  that  a  recognition  of 

1  Speech,   Rep.   Paine:   Congressional  Globe,  1865-66,  Part  2, 
p.  1689. 


BANKRUPTCY  ACT  OF  1867  295 

the  exemption  laws  of  the  states  would  defeat  uniformity 
in  bankrupt  legislation  and  practically  incorporate  the  ex- 
emption laws  of  the  states  into  the  National  law.  It  was 
urged  too  that  the  annulment  of  these  laws  of  the  states 
would  not  work  an  injury  to  debtors,  since  the  latter 
would  receive  something  from  the  National  Act  in  the 
form  of  a  discharge  from  future  debts,  a  discharge  which 
could  not  be  granted  by  the  states  in  any  of  their  laws. 

The  sectional  question,  which  at  this  time  was  ex- 
tremely bitter,  played  a  part  in  the  discussion.     Creditors 
of  northern  cities  petitioned  Congress  to  pass 
a  National  Bankruptcy  Act  to  assist  them  in    sectjonai 
collecting    debts    in    the    South.     The    most    question 
valuable  property  of  the  South  was  in  estates,    m  the 
and  the  southern  land  owners  were  influential    ? 
in  the  state  legislatures.     It  was  claimed  that 
if  creditors  should  fail  to  collect  claims  in  state  courts, 
they  would  succeed  in  the  United  States  Courts  under  a 
national  bankrupt  law.     The  sectional  feeling  was  still 
further  reflected  in  the  views  of  some  northern  congress- 
men, of  which  Charles  Sumner  was  a  conspicuous  ex- 
ample, who  were  in  favor  of  denying  voluntary  bank- 
ruptcy to  those  whom  they  termed  rebels.1 

A  compromise  measure  was  agreed  upon  which  passed 
both  Houses  and  was  signed  by  the  Presi-      a  com- 
dent  in   1867.     Like  its  predecessor,  it  pro-      promise 
vided  for  both  voluntary    and    involuntary      measure- 
bankruptcy,  but  unlike  its  predecessor,  it  extended  the 
involuntary  provisions  to  all  classes  of  bankrupts. 

1  Congressional  Globe,  1867,  Part  2,  p.  169. 


296  MERCANTILE  CREDIT 

The  District  Courts  of  the  United  States  were  given 
jurisdiction  in  their  respective  districts  in  all  matters 

pertaining  to  bankruptcy,  and  they  were 
District  required  to  be  open  at  all  times  for  the  trans- 
the  United  ac^on  °f  business  under  this  Act.  These 
States  Courts  were  given  power  to  hold  their  sessions 

given  ju-  a£  any  place  in  the  district,  after  having  given 
in  the  Act  adequate  notice.  This  provision  was  intended 
of  1867.        to  correct  defects  in  the  two  preceding  laws, 

defects  arising  from  the  inconvenience  of 
creditors  and  witnesses  in  attending  sessions  of  the 
court.  The  Circuit  Courts  of  the  United  States  were 
given  "a  general  superintendence  and  jurisdiction  of  all 
cases  and  questions  arising  under  the  Act;  they  were 
also  given  the  power  to  hear  cases  as  a  court  of  equity 
upon  petition  or  other  regular  process."  An  amend- 
ment to  the  law  in  1874  gave  the  Circuit  Courts  con- 
current jurisdiction  with  the  district  courts  in  all  cases 
at  law  or  equity  brought  against  the  assignee  in  bank- 
ruptcy, or  by  the  latter  against  any  person  having  an 
adverse  interest  with  reference  to  the  property  or 
property  rights  of  the  bankrupt. 

ADMINISTRATION  OF  THE  LAW 

It  was  made  the  duty  of  the  judges  of  the  District 
Courts  to  appoint  in  each  congressional  district,  upon 
Duties  of  *ne  recommendation  of  the  Chief  Justice  of 
District  the  Supreme  Court,  one  or  more  registers  in 
Courts  and  bankruptcy  "  to  assist  the  judge  of  the  District 
Court  in  the  performance  of  his  duties  under 


BANKRUPTCY  ACT  OF  1867  297 

this  Act."  The  register  was  required  "to  receive  the 
surrender  of  a  bankrupt,  to  administer  oaths  in  all  pro- 
ceedings before  him,  to  preside  at  meetings  of  creditors, 
to  take  proof  of  debts,  to  make  all  compilations  of  divi- 
dends, and  all  orders  of  distribution,  and  to  furnish  the 
assignee  with  a  certified  copy  of  such  orders,  and  of  the 
schedules  of  creditors  and  assets  filed  in  each  case."  He 
was  also  required  to  audit  and  pass  on  the  accounts  of 
assignees,  and  to  do  such  administrative  business  of  the 
court  as  the  district  judge  should  direct.  He  was  to  keep 
memoranda  of  the  proceedings  coming  before  him  and 
to  forward  to  the  clerk  of  the  District  Court  a  certified 
copy  of  these  memoranda.  The  judge  of  the  District 
Court  could  require  the  register  to  go  any  place  within  the 
district  for  the  purpose  of  performing  the  various  func- 
tions of  his  office.  All  cases  in  equity  could  be  appealed 
from  the  District  Courts  to  the  Circuit  Courts,  but  no 
cases  could  be  appealed  from  the  Circuit  Courts  to  the 
Supreme  Court  unless  the  matter  in  dispute  exceeded 
$2,000.  This  Act  was  amended  in  1874  with  reference 
to  the  latter  provision,  so  that  no  case  could  be  appealed 
from  the  Circuit  to  the  Supreme  Court  unless  the  amount 
at  issue  exceeded  $5,000. 

In  the  provisions  stated  above  is  found  another  attempt 
to  bring  the  bankruptcy  court  within  easy  access  of  the 
people.     The  registers  to  be  appointed  were   Attempt 
to  be  lawyers,  and  they  were  to  have  almost   to  make 

complete  charge  of  cases  in  bankruptcy.     As   the  courts 
,  .    ,     ,   .  ,     ,     .  ,    ,.         convenient 

one  was  to  be  appointed  m  each  legislative   t0  iiie 

district  and  as  the  register  could  be  required   people. 


298  MERCANTILE  CREDIT 

to  hold  his  court  at  any  place  within  the  district, 
the  arguments  against  the  former  laws  with  reference 
to  the  expense  and  inconvenience  in  attending  these 
courts  could  not  be  applied  with  equal  force  to  the  Bank- 
ruptcy Act  of  1867. 

The  law  which  first  passed  the  Senate  required  the 
circuit  judges  to  appoint  the  registers  upon  the  recom- 
mendation of  the  Chief  Justice  of  the  Supreme 

Reasons       Court.     This  provision  was  amended  in  the 

whv 

district         House  by  placing  the  obligation  to  appoint  reg- 

judges  isters  on  the  district  judges.  When  the  House 
should  amendment  returned  to  the  Senate,  it  provoked 
registers  a  Srea*  deal  of  discussion,  which  showed  that 
partisanship  had  much  to  do  in  determining 
where  the  appointing  power  should  be  placed.  In  favor 
of  the  House  Amendment  it  was  claimed  that  since  the 
district  judges  have  charge  of  the  cases  in  bankruptcy, 
and  the  registers  work  under  them,  the  latter  should 
be  appointed  by  the  former.  It  was  claimed,  moreover, 
that  the  district  judges  would  know  the  members  of  the 
bar  from  which  the  appointments  must  be  made,  whereas 
the  circuit  judges  could  not  in  the  nature  of  things  know 
the  lawyers,  and  the  appointments  would  be  dictated  by 
politicians.  It  was  thought  that  the  office  of  Chief 
Justice  of  the  Supreme  Court  would  be  degraded  by 
making  the  Chief  Justice  responsible  for  partisan 
appointments. 

On  the  opposite  side  it  was  argued  that  the  district 
judges  were  amenable  to  the  circuit  judges,  and  that  the 
registers,    who    were    subordinates    of    district   judges, 


BANKRUPTCY  ACT  OF  1867 


299 


should  be  also  under  the  authority  of  the  Circuit  Judge. 
It  was  claimed  that  as  the  Chief  Justice  of  the  Supreme 
Court  is  the  head  of  the  judicial  system  of 
the  United  States,  the  appointment  of  officers 
of  the  court  by  him  would  not  degrade  his 
office  any  more  than  the  appointment  of 
government  employees  by  the  President  of  the 
United  States  degrades  the  latter's  office.  A 
compromise  was  finally  reached,  which  placed 
the  appointment  of  the  registers  in  the  hands 
of  the  district  judges  upon  the  recommenda- 
tion of  the  Chief  Justice  of  the  United  States. 


Reasons 
why 
circuit 
judges 
should 
appoint 
registers. 
Compro- 
mise 
adopted. 


VOLUNTARY  BANKRUPTCY 

Any  person  owing  debts  to  exceed  $300  might  apply 

for  the  benefits  of  this  Act  to  the  judge  of  the  Judicial 

District  in  which  the  debtor  resided  for  six    __ 

Who 
months  previous  to   filing  the   petition,   by   mjght 

stating  his  place  of  residence,  his  inability  to    become 

pay  his  debts,  and  his  willingness  to  surrender   voluQtary 

all  his  property  for  the  benefit  of  his  creditors. 

The  requirement  that  the  debtor  must  owe  $300  before 

he  could  go  into  bankruptcy  was  intended  to  prevent 

those  who  owed  small  amounts  incurred  chiefly  by  living 

beyond  their  means,  from  cancelling  their  debts.     The 

debtor  was  required  "to  annex  to  his  petition  a  schedule 

verified  by  oath  before  the  Court"  or  before  an  agent  of 

the  court  giving  a  full  statement  of  all  his  debts,  the  names 

of  his  creditors,  there  places  of  residence,  the  nature  of 

each  debt,  and  the  manner  by  which  it  was  incurred. 


300  MERCANTILE  CREDIT 

He  was  required  to  give  also  a  statement  of  any  existing 
mortgage  or  pledge  given  for  payment  in  case  there  was 
either  of  such  in  existence.  The  filing  of  this  petition 
was  considered  an  act  of  bankruptcy,  provided  that  the 
applicant  took  an  oath  of  allegiance  to  the  United  States 
and  that  the  court  was  convinced  that  the  debtor  owed 
debts  in  excess  of  $300.  *  The  judge  was  required  to 
order  such  notices  published  in  the  newspapers  as  the 
warrant  prescribed.  He  was  required  also  to  cause  a 
written  or  printed  notice  to  be  sent  by  mail  or  by 
messenger  to  the  creditors  to  the  effect:  (1)  "That  a 
warrant  in  bankruptcy  has  been  issued  against  the  estate 
of  the  debtor;  (2)  that  the  payment  of  any  debts  or  the 
delivery  of  property  to  the  debtor  or  the  transfer  of  any 
property  is  forbidden;  (3)  that  a  meeting  of  the  creditors 
of  the  debtor  will  be  held  to  prove  their  debts  at  a  court 
of  bankruptcy,  to  be  held  at  a  specified  time  not  less  than 
ten  nor  more  than  ninety  days  after  the  issuing  of  the 
warrant." 

The  creditors  were  required  to  elect,  at  their  first 
meeting,  one  or  more  assignees  of  the  debtor's  estate. 

The  choice  was  to  be  made  "by  the  greater 
of  part  in  value  and  in  number  of  the  creditors 

assignees,  who  have  proved  their  debts."2  If  the  as- 
Property  signees  were  not  chosen  at  this  meeting  the 
,     .  register  might  appoint  them  if  there  was  no 

opposition,  and  the  district  judge  might  ap- 

1  This  clause  was  for  the  benefit  of  those  who  shortly  before  had 
participated  in  the  secession  movement. 

2  Section  12,  The  Bankruptcy  Act  of  1867. 


BANKRUPTCY  ACT  OF  1867  301 

point  if  he  chose  to  do  so;  but  he  must  appoint  the  as- 
signees if  there  was  opposition  to  their  appointment  by 
the  register.  The  approval  of  the  judge  was  necessary 
to  the  election  or  to  the  appointment  of  an  assignee.  As 
soon  as  the  assignee  was  appointed  "the  judge  shall  (or 
where  there  is  no  opposing  interest  the  register  may)  con- 
vey to  the  assignee  all  the  property  and  property  rights 
of  the  bankrupt  with  the  following  exceptions:"  (1)  The 
necessary  household  and  kitchen  furniture,  and  such 
other  necessities  of  the  bankrupt  as  the  assignee  might 
designate  taking  into  account  the  circumstances  of  the 
family,  but  the  whole  amount  was  not  to  exceed  $500. 
(2)  "The  wearing  apparel  of  the  bankrupt,  and  that  of 
his  wife  and  children."1  (3)  "The  uniform,  arms,  and 
equipment  of  any  person  who  is  or  has  been  a  soldier 
in  the  militia  or  in  the  service  of  the  United  States." 
(4)  Such  property  as  was  exempted  from  seizure, 
attachment  or  "levy  on  execution  by  the  laws  of  the 
United  States."  (5)  Other  property  not  included  in  the 
foregoing  exceptions,  which  was  exempted  from  levy 
in  the  payment  of  debts  by  the  state  where  the  bankrupt 
resides,  "to  an  amount  not  exceeding  that  allowed  by 
such  state  exemption  laws  in  force  in  1864." 

The  assignee  was  given  power  to  dispose  of  the  prop- 
erty of  the  bankrupt  to  the  best  interest  of  the  creditors. 

An  account  of  all  money  received  by  him  as 

.      i       ,       ,        i  .  ,  ,  Duties  of 

assignee  was  to  be  kept,  which  account  any 

creditor    might    examine    at    any  reasonable 

time.     He   was  also  given  the   same  rights  to  collect 

1  Section  14,  The  Bankruptcy  Act  of  1867. 


302  MERCANTILE  CREDIT 

debts  owed  the  estate  of  the  bankrupt  as  the 
debtor  would  have  in  the  absence  of  bankruptcy  pro- 
ceedings. 

The  court  might  require  its  bankrupt  to  submit  to  an 
examination  under  oath  regarding  all  matters  pertaining 

to  his  property,  its  condition,  his  accounts, 
An  exam-  .11  . 

ination  of     e*c'     The  court   might   also  require   the  at- 

the  bank-    tendance  of  any  other   person  for  a  similar 

rupt  and  investigation.  The  wife  of  the  bankrupt 
his  flffflirs 

might  also  be  required  to  attend  court  to  be 
examined  as  a  witness  and  if  she  refused,  the  bankrupt's 
discharge  was  to  be  denied  unless  the  latter  proved  to  the 
satisfaction  of  the  court  that  "he  was  unable  to  procure 
the  attendance  of  his  wife." 

The  following  debts  were  entitled  to  priority,  each  to 
be  paid  in  full  in  the  following  order:  (l)     The  costs  of 

closing  up  the    estate;    (2)  debts  owed   the 

Debts  en-    United  States  including  all  taxes  and  assess- 

titled  to  /\ii  7    , 

priority.        ments;    (3)  debts  owed  the  state  and  taxes 

and  assessments  under  the  laws  of  the  state; 

(4)  wages  due  an  operator,  clerk  or  house  servant  not 

to  exceed  $50  for  labor  performed  within  six  months  of 

the   time    of   the    first   publication    of   proceedings   in 

bankruptcy;  (5)  all  debts  due  any  one  who  by  the  laws 

of  the  United  States  is  entitled  to  preference. 


DISCHARGE 

Any  time  between  six  months  and  a  year  after  the 
adjudication  in  bankruptcy  the  debtor  may  apply  for  a 


BANKRUPTCY  ACT  OF  1867  303 

discharge  from  his  debts.  The  court  is  then  required 
to  give  notice  by  mail  to  all  creditors  and  to  publish  a 
notice  once  a  week  in  newspapers  having  a 
general  circulation  in  the  district,  calling  a  What  Pre~ 
meeting  of  creditors  to  show  why  the  debtor  discharge, 
shall  not  be  discharged.  Here  follows  a  long 
list  of  things  which  will  prevent  a  bankrupt  from  secur- 
ing a  discharge,  of  which  the  chief  ones  are:  (1)  Swear- 
ing falsely  regarding  any  matter  pertaining  to  his  estate; 
(2)  concealing  a  portion  of  his  estate  or  any  of  his  records 
or  falsifying  his  records;  (3)  giving  a  preference  within 
four  months  previous  to  the  beginning  of  proceedings  in 
bankruptcy  or  making  a  fraudulent  assignment  of  his 
property;  (4)  losing  a  part  of  his  property  in  gambling; 
(5)  admitting  a  false  or  fictitious  debt  against  his  estate, 
or  failing  to  disclose  the  fact  that  such  a  debt  had  been 
proved;  (6)  failing  as  a  "merchant  or  tradesman"  to 
keep  proper  books  of  account. 

No  person  discharged  under  this  Act  can  be  discharged 
a  second  time  on  his  own  petition  if  his  assets  do  not 

pay  70  per  cent,  of  his  debts,  unless  three-     _     ,. 
.  Condi- 

fourths  in  value  of  his  creditors  who  have    ^oas  Re- 
proved their   claims    give  their  consent    in    termining 
writing    to    his    discharge.     Any   bankrupt,    a  second 
however,  who  has  proved  to  the  satisfaction 
of  the  court  that  he  paid  all  his  debts  at  the  time  of 
his  previous  bankruptcy  or  who  has  been  released  vol- 
untarily by  his  creditors,  may  be  discharged  under  the 
same   conditions   as   if    he   had  not  been  a   bankrupt 
previously. 


304  MERCANTILE  CREDIT 

An  amendment  was  before  the  Senate  requiring  as  a 
condition  necessary  to  a  discharge  that  the  assets  of  a 
bankrupt  should  pay  50  per  cent,  of  his  debts,  or  else 
that  a  majority  of  his  creditors  should  vote  for  his  dis- 
charge. This  amendment  was  opposed  on  the  ground 
that  its  acceptance  would  defeat  the  Bill.  The  interests 
of  those  who  desired  a  discharge  from  debt  were  so 
strongly  represented  in  Congress,  that  its  defeat  was  in- 
evitable. At  this  time  a  requirement  that  50  per  cent, 
of  the  debts  should  be  paid  would  exclude  from  the  priv- 
ileges of  discharge  all  but  very  exceptional  bankrupts. 

INVOLUNTARY  BANKRUPTCY 

A  person  might  be  made  an  involuntary  bankrupt  for 

any  one  of  the  following  reasons:   (1)  Absenting  himself 

from  the  state  or  territory  where  he  lives  or 
Who  may  ,.  .  .. 

be  made      concealing  himself  to  defraud  his  creditors; 

an  in-  (2)    concealing    or   removing    his   property, 

voluntary  giving  away  or  disposing  of  it,  to  defraud  or 
delay  action  on  the  part  of  his  creditors;  (3) 
while  insolvent  or  in  contemplation  of  insolvency  dis- 
posing of  or  transferring  his  property  with  intent  to 
prefer  creditors  or  otherwise  to  defeat  the  operations  of 
the  law;  (4).  committting  an  act  of  bankruptcy  and 
being  adjudged  a  bankrupt  on  petition  of  one  or  more 
creditors  whose  total  debts  amounted  to  at  least  $250, 
provided  the  petition  was  filed  within  six  months  of  the 
act  of  bankruptcy. 

When  a  petition  was  filed  to  make  a  debtor  a  bankrupt, 
if  the  evidence  was  sufficient  the  court  might  order  the 


BANKRUPTCY  ACT  OF  1867  305 

debtor  to  appear  before  it  to  show  why  he  should  not 
be  made  a  bankrupt.  If  the  petitioners  could  not 
establish  their  charges  the  debtor  was  to  be  A  petition 
dismissed,  and  he  had  the  right  to  collect  to  make  a 
damages.  If  the  charges  preferred  in  the  debtor  a 
petition  were  found  to  be  true,  the  court  an  up  ' 
should  adjudge  the  debtor  a  bankrupt  and  was  required 
immediately  to  issue  a  warrant  for  the  taking  possession 
of  his  property.  The  property  should  be  taken,  dis- 
posed of,  and  distributed  in  the  same  manner  as  if  the 
debtor  became  a  bankrupt  on  his  own  petition. 

At  a  meeting  of  the  creditors,  three-fourths  in  value  of 
the  creditors  whose  claims  had  been  proved  might  decide 
what  action  should  be  taken  in  the  interests  of  controi  of 
the  creditors  with  reference  to  the  estate  of  the  debtor's 
debtor.  They  might  decide  that  the  estate  esta*e  b7 
should  be  settled  and  divided  among  the  cred- 
itors by  trustees,  under  the  direction  of  a  committee  of 
the  creditors,  the  creditors  to  have  the  right  to  nominate 
one  or  more  trustees  to  close  the  estate.  However,  the 
sanction  of  the  court  when  it  deemed  that  the  interests 
of  the  creditors  would  be  promoted  by  this  action,  was 
necessary.  When  three-fourths  in  value  of  the  creditors 
whose  claims  had  been  proved  filed  their  consent  that 
the  estate  of  the  bankrupt  be  wound  up  and  settled 
by  the  trustees,  it  became  the  duty  of  the  bankrupt  or 
his  assignee  to  transfer  the  estate  to  the  trustees,  the 
latter  having  the  same  power  in  holding  and  disposing 
of  the  property  as  the  assignee  would  have  had  if  the 
resolution  of  the  trustees  had  not  been  passed. 


306  MERCANTILE  CREDIT 

The  bankrupt  in  involuntary  proceedings  had  the  same 
right  to  petition  for  a  discharge  in  bankruptcy  and  was 
entitled  to  the  same  treatment  as  if  he  became  a  bankrupt 
on  his  own  initiative. 

All  the  fraudulent  acts  which  made  a  debtor  an 
Punish-  involuntary  bankrupt  made  him  guilty  of  a 
mentfor       misdemeanor,  and  upon  proof  of  this  in  any 

amis-  court   of   the    United    States    he    might    be 

demeanor.    •  j  *  ,  ,1         ,-t 

imprisoned  tor  not  more  than  three  years. 

At  the  outset  the  law  was  acceptable  to  both  debtors 

and  creditors.     It  had  been  carefully  drawn  after  the 

best    models.     The    chief    models    used    in 

Modeled      framing  the  laws  were  the  Insolvency  Law  of 

after  the  Massachusetts  and  the  Bankruptcy  Act  of 
law  of  . 

Massa-        England.     Unforeseen    defects    appeared    in 

chusetts  practice,  and  it  proved  much  more  unsatis- 
and  the  factory  than  either  of  the  former  laws.  An 
Bankrupt  English  Act  of  1831  established  a  system  of 
Act.  officials  to  handle  the  cases  of  bankrupts,  and 

this  law  was  not  repealed  until  1869.  This 
Act  provided  for  a  court  of  review,  composed  of  a  chief 
judge  and  three  junior  judges,  to  take  charge  of  bankrupt 
cases.  Thirty  official  assignees  were  appointed  to  act 
with  creditor  assignees.  The  machinery  for  closing 
estates  was  cumbrous,  slow,  and  expensive,  and  proved 
very  unsatisfactory. 

The  American  Act  of  1867  proved  even  more  unsatis- 
factory than  the  English  law.  The  methods  of  closing 
estates  were  slow  and  expensive,  and  the  courts  were  not 
held  at  places  where  they  were  easy  of  access  by  the 


BANKRUPTCY  ACT  OF  1867  307 

people.     The  law  would  have  been  repealed  long  before 
1878  if  it  had  not  been  for  the  disturbed  industrial  con- 
ditions of  the  United  States.     The  compensa- 
tion of  all  officers  and  attaches  of  the  court     , e  e.      °, 

the  Act  of 
was  in  fees,  and  the  earnings  of  each  officer    1867. 

were  not  in  proportion  to  his  services.  The 
failure  to  limit  definitely  the  work  of  each  official  for  which 
fees  might  be  received  made  the  costs  of  closing  an  estate 
subject  to  the  desires  of  the  officers  who  had  it  in  charge. 
The  answer  of  an  English  candidate  for  admission  to  the 
bar  to  the  question  "What  is  the  province  of  the  courts 
in  bankruptcy?"  seemed  to  state  quite  accurately  the 
conditions  under  which  the  Bankruptcy  Act  of  1867 
operated,  viz.,  "To  see  the  estate  of  the  bankrupt 
equally  divided  between  the  officers  of  the  court  and  the 
attorneys  engaged  in  the  cause." 

The  law  presupposed  the  appointment  of  high  grade 
lawyers  as  registers.  Instead  of  these,  broken  down 
politicians  and  men  who  were  failures  in  the  class  of 
practice  of  the  law  were  frequently  appointed,  registers 
Although  the  duties  of  the  registers  were  aPPointed« 
limited  and  their  powers  were  restricted,  means  were 
devised  to  extend  these  powers  and  increase  their  fees. 

In  case  this  was  done  a  voluntary  petitioner  would  bring 
his  schedule  to  the  register,  the  latter  would  induce  him 
to  change  it  under  the  assumption  that  it  was    Methods 
not  made  out  properly  for  which  he  would  re-    employed 
ceive  a  fee;  he  received  another  fee  also  for    t0  make 
giving  an  oath.      In  proving  his  claims  the    oi  estates 
creditor  would  be  induced  to  change  his  affi-    expensive. 


308  MERCANTILE  CREDIT 

davit  for  which  the  register  would  receive  fees.  When 
the  creditor  could  not  attend  a  meeting  of  creditors, 
he  had  to  give  a  power  of  attorney,  for  which  the 
register  received  another  fee.  In  taking  proofs  the 
register  found  other  ways  of  securing  fees.  When 
proofs  were  objected  to,  the  objection  had  to  be  put 
in  writing;  a  time  and  place  were  assigned  for  hearing 
cases,  and  another  opportunity  was  presented  to  the 
register  to  increase  his  income.  The  register  and  as- 
signee frequently  worked  together,  and  the  former  was 
in  a  position  to  help  the  latter  to  secure  an  income  much 
above  what  the  law  assumed  he  would  receive.  The 
marshal  and  clerk  of  the  court  were  also  permitted  to 
receive  exorbitant  fees  for  the  labor  they  performed. 
The  system  of  the  court  officials  to  secure  the  bulk 
of  the  bankrupt  estate  was  such  that  in  a  few  years 
most  creditors  decided  to  settle  their  claims  out  of 
court. 

An  amendment  was  passed  in  1870  which  provided 
that  any  one  "who  stopped  or  suspended  and  had  not 
The  resumed  the  payment  of  commercial  paper 

amend-  within  a  period  of  fourteen  days"  could  be 
ment  of        proceeded  against  as  a  bankrupt.     With  the 

1870 

panic  of  1873  many  influential  creditors  saw 
that  they  might  become  debtors  at  any  time,  and  that 
under  the  above  amendment  they  could  be  proceeded 
against  for  the  suspension  of  the  payment  of  commercial 
paper.  Their  influence  was  at  once  exerted  to  modify 
the  involuntary  provisions  of  the  bankruptcy  law.  In 
his  message  to  Congress  in  1873,  President  Grant  pointed 


BANKRUPTCY  ACT  OF  1867  309 

out  some  of  the  weak  points  in  the  law  that  would  make 
themselves  felt  in  a  period  of  commercial  depression, 
and  recommended  either  the  entire  repeal  of  the  law  or 
else  the  repeal  of  the  involuntary  provisions.  He  claimed 
that  the  involuntary  provisions  continued  to  embarrass 
the  country;  that  in  times  of  monetary  stringency  even 
prudent  business  men  were  made  bankrupts  although 
their  assets  might  exceed  their  liabilities;  and  that  this 
country  had  gotten  into  such  a  nervous  state  that  the 
filing  of  a  petition  by  an  unfriendly  creditor  often  ruined 
responsible  business  men. 

The  important  changes  introduced  in  the  bankruptcy 
law  of  1867  by  the  amendments  of  1874  had  to  do  with 
changes  in  the  involuntary  features,  and  the  provision 
for  settlement  out  of  court. 

The  Act  of  1867  as  amended  in  1870  made  the  sus- 
pension of  payment  of  commercial  paper  for  fourteen 
days  by  a  banker,  merchant  or  trader  a  reason 
for   action  in   involuntary  bankruptcy.     An      Amen  " 
amendment   of    1874    made    the   fraudulent      ^874. 
stopping  of  payment  or  the  suspension  of 
payment  in  the  ordinary  course  of  business  for  forty  days 
a  cause  for  action  in  involuntary  bankruptcy. 

Under  the  Act  of  1867  a  debtor  could  be  adjudged  a 
bankrupt  upon  petition  of  one  or  more  creditors  if  their 
debts  aggregated  $250.  This  clause  was  amended  in 
1874  so  as  to  require  the  petition  to  make  a  debtor  a 
bankrupt  to  come  from  at  least  one-fourth  of  the  cred- 
itors whose  debts  amounted  to  at  least  one-third  of  the 
provable  debts  of  the  bankrupt.     In   all  cases  where 


310 


MERCANTILE  CREDIT 


The 

Amend- 
ment of 
1874 

weakened 
the  in- 
voluntary 
law. 


action  was  initiated  by  petitioners  not  in  conformity 
with  this  amendment,  the  cases  were  to  be  dismissed  at 
the  expense  of  the  petitioners. 

This  amendment  practically  repealed  the  involuntary 
provisions  of  the  law.  The  risk  to  the  creditors  in  all 
but  very  exceptional  cases  was  entirely  too 
great  for  them  to  take  action  to  throw  a  debtor 
into  bankruptcy.  It  was  claimed  that  no  one 
could  be  made  an  involuntary  bankrupt  ex- 
cept by  his  own  consent.  An  involuntary 
bankrupt  received  his  discharge  more  easily 
than  one  who  sought  voluntarily  for  the  bene- 
fits of  the  law.  By  a  perverse  ingenuity  the 
law  was  so  constructed  that  it  was  to  the  interest  of 
the  debtor  to  be  made  an  involuntary  bankrupt,  al- 
though the  creditor  preferred  that  the  debtor  go  into 
bankruptcy  voluntarily. 

The  suggestion  for  the  other  important  change  in  the 
law  of  1867  came  from  the  English  law  of  1869  providing 
for  settlements  outside  of  court.     This  pro- 
vision enabled  the  debtor  to  offer  terms  of 
composition  which,  if  accepted  by  a  majority 
in  number  representing  three-fourths  in  value 
of  the  creditors  at  a  meeting  called  by  the 
court,  and  if  confirmed  by  the  signatures  of 
the  debtor  and  two-thirds  in  number  and  one- 
half  in  value  of  the  creditors,  became  binding. 
The  debtor  or  a  representative  of  him  was 
required  to  be  present  at  this  meeting  and  "produce  a 
statement  showing  the  whole  value  of  his  assets  and  debts 


A  second 
amend- 
ment of 
1874 
enabled 
estates  to 
be  settled 
out  of 
court. 


BANKRUPTCY  ACT  OF  1867  311 

and  the  names  and  addresses  of  the  creditors  to  whom 
such  debts  respectively  are  due." 

Since  the  law  of  1867  and  the  preceding  laws  were 
modeled  to  a  certain  extent  after  the  English  laws,  it  was 
quite    natural  for  us  to  go  to  the  English 
amendments  of  1869  for  suggestions  when  an       ^j^  of 
amendment  of  the  law  of  1867  was  contem-    settling 
plated.     The  English  law  of  1869  permitted    estates 
the  debtor  to  petition  for  the  liquidation  of  his  . 

affairs  by  arrangement,  or  by  offering  directly 
to  his  creditors  terms  of  composition.  The  latter  method 
is  simpler  and  less  expensive  than  the  one  described  in  the 
preceding  paragraph.  The  debtor  offers  to  settle  at  so 
much  on  the  dollar,  and  if  his  offer  is  accepted  by  his 
creditors,  he  is  discharged.  This  law  left  matters  to  too 
great  an  extent  in  the  hands  of  debtors  in  that  they  were 
permitted  to  pursue  the  practice  of  going  among  creditors 
to  obtain  proxies  before  a  meeting  was  called  and  before 
concerted  action  could  be  taken.  No  definite  control 
was  exercised  over  the  debtor's  statement  of  his  assets 
and  his  liabilities,  and  consequently  this  route  to  settle- 
ment became  the  recourse  of  the  dishonest.  Settlement 
by  composition  in  England  became  a  failure. 

In  the  United  States  a  difference  of  opinion  prevailed 
as  to  the  value  of  settlements  by  composition.  Settle- 
ments were  made  at  much  less  expense  than  that  re- 
quired by  going  through  bankruptcy,  and  the  extraor- 
dinary abuses  reached  in  England  in  settlements  by 
composition  did  not  prevail  here.  However,  the  law  in 
the  United  States  did  not  protect  creditors  by  adequate 


312  MERCANTILE  CREDIT 

safeguards  against  fraudulent  debtors  by  requiring  a 
careful  examination  of  their  books  and  a  thorough  ex- 
amination of  their  affairs  before  accepting  their  terms 
of  composition. 

The  amendments  of  1874,  instead  of  improving  the 

law,  had  only  made  matters  worse.     At  the  session  of 

Congress    in    which    the    amendments    were 

Elements  passe(j  the  House  was  in  favor  of  a  repeal  of 
of  . 

weakness     *ne  bankrupt  law.     In   1876  the   sentiment 

in  the  within    the    House    was    so    overwhelmingly 

amend-  against  the  law  that  the  House  voted  to  repeal 
1874  it  without  debate.     A  memorial  requesting  its 

repeal  gives  us  some  clue  to  the  arguments 
which  influenced  the  members.  It  was  claimed  that 
fraudulent  preferences  were  not  prevented  by  the  law, 
that  large  debts  were  often  incurred  with  the  expecta- 
tion of  compromise,  that  the  closing  of  estates  was  un- 
reasonably prolonged,  and  that  the  expenses  of  settling 
estates  discouraged  bankruptcy  proceedings  altogether. 

A  bill  providing  for  the  repeal  of  the  law  was  intro- 
duced by  Senator  MacCreery  of  Kentucky,  October.  17, 
A  bill  to  1877.  It  was  submitted  to  the  Judiciary 
repeal  the  Committee,  which  reported  favorably  for 
law-  repeal   April    10,    1878.     In  introducing  the 

bill  Senator  MacCreery  said  that  "the  only  ones  who 
will  regret  the  repeal  are  those  who  have  fattened  on 
the  fees  and  those  getting  ready  for  its  advantages." 

The  legislators  at  this  time  were  divided  into  three 
camps:  1.  Those  who  wanted  the  law  amended;  2. 
those  who  wanted  immediate  and  unconditional  repeal ; 


BANKRUPTCY  ACT  OF  1867  313 

3.  those  who  desired  the  repeal  of  the  law  but  who  wished 

a  delay  of  the  repeal  of  the  voluntary  provisions  until 

January  1,  1879.     The  extremes  to  which  we 

had  gone  in  bankruptcy  may  be  seen  from  the    ^lverse 

.  .  views  of 

fact  that  every  one  was  in  favor  of  an  imme-    members 

diate  repeal  of  the  involuntary  portion  of  the    of 

law.       When  the  repeal  of  the  law  of  1841     Congress 

was  up  for  consideration,  the  voluntary  pro-    ruptcy 

visions  of  that  law  were  aimed  at  chiefly  as 

they  were  considered  unconstitutional    and    dangerous 

to  industrial  stability. 

Senator  Matthews  of  Ohio  introduced  an  amendment 
repealing  the  law  of  1867  but  substituting  a  simple  law 
abolishing  involuntary  bankruptcy  and  mak-    An     1 10 
ing  possible  a  discharge  in  voluntary  bank-    repeal  the 
ruptcy  when  the  assets  paid  50  per  cent,  of  the    Involun- 
debts.     It    was    provided    that    a    discharge 
should  not  be  extended  to  what  had  been  acquired  fraud- 
ulently or  to  obligations  that  had  been  incurred  by  means 
of  a  breach  of  trust.     After  much  discussion  this  amend- 
ment was  rejected.     It  was  claimed  that  the  amendment 
should  go  back  to  the  Judicial  Committee,  a  process 
which  would  delay  action,  and  Congress  was  in  no  mood 
to  postpone  the  time  for  the  repeal  of  the  law. 

Much  difference  of  opinion  prevailed  on  the  postpone- 
ment of  the  time  when  the  repeal  of  the  voluntary  pro- 
visions of  the  law  should  take  effect.     Those    Time  at 
favoring  postponement  felt  that  some  time    which  the 
should  be  given  for  the  adjustment  of  affairs    ^q^^  g0 
to  the  new  conditions,  and  some  time  for  those    into  effect. 


314  MERCANTILE  CREDIT 

contemplating    bankruptcy   to    begin    action.       Those 

opposed  to  postponement  contended  that  delay  would 

cause  a  demoralization  in  business  by  the  great  rush  of 

prospective  bankrupts  to  the  bankruptcy  courts. 

Some  of  the  prominent  members  of  the  Senate  believed 

that  a  national  bankruptcy  act   would  be  superior  to 

the  insolvency  laws   of  the  various    states, 

repealed       an<^  though  they  admitted  that  the  law  of 

to  take         1867  was  a  failure,  they  hoped  that  it  might 

effect  at       foe  amended  so  as  to  meet  the  approval  of 

members  of  Congress.     The  difficulties  in  the 
exception  ° 

of  cases  in    way  of  preparing  a  satisfactory  law  to  satisfy 

process  of    the  industrial  conditions  in  the  various  states 

were  pointed  out.     It  was  contended  that  the 
ment. 

framing  of  a  satisfactory  law  for  England  was 

a  difficult  thing.  This  was  to  be  seen  in  the  fact  that 
although  she  was  a  commercial  nation  and  did  not  en- 
joy the  variety  of  industrial  interests  possessed  by  the 
United  States  she  made  frequent  changes  of  the  bank- 
ruptcy law.  By  a  large  majority  in  both  Houses,  the 
bill  was  finally  repealed  to  take  effect  at  once,  with  the 
exception  that  cases  in  process  of  settlement  were  not  to 
be  affected  by  the  repeal. 

In  the  eleven  years  the  law  was  in  force  over  100,000 
bankrupt  cases  were  considered.  The  distribution  of 
these  cases  shows  that  commercial  interests  in  any  sec- 
tion of  the  country  determine  the  importance  of  the  law 
to  it.  One  district  of  Florida  had  in  all  these  years  but 
one  case,  whereas  Massachusetts  alone  had  9,000  cases. 

The  law  proved  a  failure  because  of  the  costs  of  settle- 


BANKRUPTCY  ACT  OF  1867  315 

ments,  delays  in  closing  up  affairs,  the  inaccessibility  of 

the  courts,  and  the  failure  of  the  involuntary  provision 

by  the  Amendment  of  1874.     The  law  died 

of  these  diseases,  says  a  critic:  "fees,  obstruc-    ,     y 

law  was  a 
tions  to  involuntary  proceedings,  and  com-    fanure. 

positions."     Opinions  differ  with  reference  to 
compositions,  but  all  were  agreed  that  costs  in  settling 
estates  and  the  shortcomings  of  the  involuntary  provi- 
sions were  important  factors  in  defeating  the  law. 

If  the  officials  of  the  court  had  been  paid  salaries  in- 
stead of  fees  and  if  penalties  had  been  imposed  when 
estates  were  not  settled  within  a  given  period,  the  law 
would  have  been  greatly  improved.  It  was  made  too 
easy  to  go  into  bankruptcy  and  too  difficult  to  force  an 
unwilling  debtor  into  bankruptcy  and  bring  about  a 
proper  disposing  of  his  estate.  The  United  States  courts 
were  too  inaccessible,  and  lawyers  and  others  did  not  seem 
to  be  familiar  with  the  workings  of  the  law.  It  is  always 
easier  to  repeal  a  bad  measure  than  to  correct  its  defects, 
and  therefore  the  easiest  policy  was  pursued  by  Congress. 


CHAPTER  XIX 
BANKRUPTCY  ACT  OF  1898 

The  law  of  1867  would  have  been  repealed  before  1878 

if  it  were  not  for  the  fact  that  a  large  class  of  business 

men  believed  that  the  class  of  interests  they 
Conven-  . 

tions  to        represented  would  be  best  served  by  a  national 

formulate  bankrupt  law.  They  consequently  hoped 
a  bank-  ^na^.  ^he  law  of  1867  might  be  amended  in 
such  a  way  as  to  eliminate  its  worst  features. 
Shortly  after  it  was  repealed  a  campaign  was  started  by 
them  for  the  purpose  of  enacting  a  national  law,  which 
they  hoped  would  be  permanent.  National  conventions 
were  held  in  Washington  in  1881  and  1884,  in  St.  Louis  in 
the  spring  of  1889,  and  in  Minneapolis  in  the  fall  of  1889. 
Believing  that  the  fundamental  weakness  of  the  law  of 
1867  consisted  in  its  administrative  features,  that  is,  in 
the  unnecessary  delays  and  in  the  great  costs  in  closing 
up  estates,  and  in  the  inaccessibility  of  the  federal  courts, 
they  at  once  proceeded  to  frame  a  law  in  which  these 
defects  would  be  eliminated.  Representing  commercial 
and  business  interests  they  were  naturally  concerned 
chiefly  in  raising  the  plane  of  credit  and  consequently  in 
having  a  strong  involuntary  law.  The  first  two  conven- 
tions approved  a  Bill  framed  by  Judge  Lowell  of  Massa- 
chusetts. It  was  believed  to  be  too  severe  on  debtors, 
however,  and  finally  at  the  Minneapolis  convention  the 

316 


BANKRUPTCY  ACT  OF  1898  317 

so-called  Torry  Bankrupt  bill,  containing  less  drastic  fea- 
tures than  the  Lowell,  was  approved. 

In  accepting  this  measure  the  convention  had  in  mind 
(1)  the  rights  of  the  creditors,  to  the  extent  of  giving 
Purposes  them  ample  protection  against  the  dishonest 
of  the  debtors,  and  preventing  the  latter  from  being 

proposed  discharged;  (2)  the  rights  of  the  debtor  to  the 
extent  of  giving  liberal  remedies  in  voluntary- 
bankruptcy  and  protecting  the  honest  from  persecution; 
(3)  the  need  for  a  law  that  would  be  in  every  respect 
national  in  its  scope,  inexpensive,  and  as  simple  as  possible 
in  its  operation. 

The  measure  proposed  by  the  Minneapolis  convention 

was  amended  frequently.     It  passed  the  House  in  the 

Fifty-first  Congress,  was  defeated  there  in  the 

Fifty-third  Congress,  and  was  passed  again  in    Efforts  to 

the  Fifty-fourth  Congress.     A  voluntary  bank-    Pajjs  the 

ruptcy  measure  introduced  by  congressman    pr0posed 

Bailey  of  Texas,   passed  the   House  in  the    by  the 

Fifty-third  Congress  but  was  not  submitted    busmess 

men's 
to  a  vote  in  the  Senate.     In  the  first  session  of    conven. 

the  Fifty-fifth  Congress  practically  the  same  tion. 
measure  passed  the  House  by  a  majority  of  76. 
In  the  second  session  of  this  Congress  the  measure  which 
passed  the  House,  and  which  became  with  the  amend- 
ments of  the  Senate  the  National  Bankrupt  Act  of  1898, 
was  introduced  by  Congressman  Henderson,  and  was 
the  original  Torry  Bill  with  amendments. 

The  author  in  speaking  for  the  measure  claimed  that 
it  would  accomplish  the  following  objects:  "(1)  Treat 


318  MERCANTILE  CREDIT 

the  honest  bankrupt  with  consideration  and  in  a  reason- 
able time  discharge  him;  (2)  punish  in   a   human  way 

dishonest  bankrupts;  (3)  reduce  the  estate  of 
Whcit  it  was 
claimed        a  bankrupt  to  cash  quickly  and  give  it  to  the 

that  the        creditors;  (4)  give  creditors  a  hearing  at  each 

measure       stage  of  the  proceedings;  (5)   substitute  in- 
would  ac-  .  -.  .        ,.,. 

comnlish      expensive  compromises  for  expensive  litiga- 
tion." 
Under  this  law  all  debtors  except  corporations  could 
petition  to  become  voluntary  bankrupts.     Each  peti- 
tioner in  voluntary  bankruptcy  was  required 
o  untary     ^Q  ^e  a  schedule  of  his  property  under  oath, 
ruptcy.         giving  in  detail  a  list  of  creditors,  the  amounts 
due  each,  and  the  security  held  by  them.     He 
was  required  to  surrender  all  his  property  aside  from  what 
the  exemption  laws  of  his  state  permitted  him  to  keep, 
while  his  creditors  were  to  take  control  of  his  property 
and  to  distribute  the  dividends.     Judges  or  referees  could 
make   adjudications   or   dismiss  petitions.     Fraudulent 
conveyances   could  be  recovered,  and  if  the  bankrupt 
committed  an  offense  punishable  by  this  Act  he  could 
be  tried  in  another  court  for  a  criminal  offense.     The 
estates  of  voluntary  and  involuntary  bankrupts  were  to 
be  administered  in  precisely  the  same  way,  and  the  rights 
of  the  two  classes  of  bankrupts  were  identical. 

All  debtors  except  farmers,  wage  earners,  and  national 
banking  institutions  owing  debts  in  excess  of  $1,000 
Involun-  could  be  made  involuntary  bankrupts.  The 
tary  bank-  petition  must  allege  one  or  more  acts  of  bank- 
ruptcy,        ruptcy,    which    include   insolvency,  inability 


BANKRUPTCY  ACT  OF  1898  319 

or  unwillingness  to  pay  debts  or  to  keep  property  from 
getting  away  by  preferences.1  The  title  of  the  trustee 
begins  with  the  date  of  adjudication  but  the  condition 
of  the  property  relates  back  to  the  time  of  filing  the 
petition  and  the  bankrupt  is  in  precisely  the  same 
position  as  any  defendant  in  law  or  equity  proceed- 
ings. 

A  petition  to  make  a  man  a  bankrupt  may  be  filed 
within  four  months  after  the  commission  of  an  act  of  bank- 
ruptcy.    "Such  time  shall  not   expire   until    _    .  . 

1  Petitions 

four  months  after  the  date  of  the  recording  or    in  mvoi_ 

registering  of  the  transfer  or  assignment  when    untary 
the  act  consists  in  the  debtor's  having  made  a    bank~ 
transfer  of  any  of  his  property  with  intent  to 
hinder,  delay  or  defraud  his  creditors;  or  for  the  purpose 
of  giving  a  preference  as  hereinbefore  provided,  or  a 
general  assignment  for  the  benefit  of  his  creditors,  if 
by  law  such  recording  or  registering  is  required  or  per- 
mitted, or,  if  it  is  not,  from  the  date  then  the  beneficiary 
takes  notorious,  exclusive,  or  continuous  possession  of  the 

1  "Acts  of  bankruptcy  by  a  person  shall  consist  of  his  having 
(1)  conveyed,  transferred,  concealed,  or  removed,  or  permitted  to 
be  concealed  or  removed,  any  part  of  his  property  with  intent  to 
hinder,  delay,  or  defraud  his  creditors,  or  any  of  them,  or  (2)  trans- 
ferred, while  insolvent,  any  portion  of  his  property  to  one  or  more 
of  his  creditors  with  intent  to  prefer  such  creditors  over  his  other 
creditors;  or  (3)  suffered  or  permitted,  while  insolvent,  any  cred- 
itor to  obtain  a  preference  through  legal  proceedings,  and  not 
having  at  least  five  days  before  a  sale  or  disposition  of  any  property 
affected  by  such  preference  vacated  or  discharged  such  preference.'' 
Five  acts  of  bankruptcy  were  enumerated  by  the  law,  two  of  which 
were  voluntary  acts  of  bankruptcy. 


320  MERCANTILE  CREDIT 

property  unless  the  petitioning  creditors  have  received 
actual  notice  of  such  transfer  or  assignment."1  A  settle- 
ment may  be  made  between  debtors  and  creditors  after 
the  debtor  has  been  examined  in  open  court  or  at  a 
meeting  of  his  creditors. 

A  bankrupt  must  petition  for  a  discharge  not  sooner 
than  one  month  or  later  than  one  year  after  adjudication. 

In  exceptional  instances  the  time  of  filing  the 
Petitions  .  .  .  _ 

in  invol-       petition  may  be  extended  six  months.     He 

untary  must  be  discharged  unless  he  has  been  found 

bank-  guilty  of  dishonesty  or  fraud  with  reference 

to  his  property.  The  confirmation  of  a  com- 
position discharges  the  bankrupt  from  all  debts  except 
those  which  were  agreed  to  be  paid  by  the  terms  of  the 
composition. 

The  Nelson  Bill,  primarily  a  voluntary  measure,  passed 
the  Senate,  and  the  matter  of  bankruptcy  was  submitted 

to  a  joint  committee  of  both  House  and  Senate. 
The  bill        ip^    measure    adopted    was    known    as    the 
which 
passed         Henderson  Bill  because  the  law  which  finally 

was  a  passed  was,  from  an  administrative  or  pro- 

com">  cedure   point   of   view,    the  House  measure. 

~,~„ *,„.<>  However,  it  will  be  seen  that  this  measure  was 
in  principle  more  nearly  the  Senate  Bill  than 
the  House  measure.  The  two  measures  differed  chiefly  on 
(1)  grounds  of  involuntary  bankruptcy,  (2)  offenses  for 
which  a  bankrupt  could  be  imprisoned,  and  (3)  restric- 
tions to  be  placed  on  a  discharge. 

1  United  States  Bankruptcy  Law  of  1898,  Ch.  3. 


BANKRUPTCY  ACT  OF  1898  321 

The  House  Bill1  stipulated  nine  grounds  for  denying 
a  bankrupt  a  discharge.     These  were  reduced  by  the 
conference  committee  to  two :  (1)  Committing    Qroun(js 
an  offense  punishable  by  indictment;  and  (2)    for 
keeping  fraudulent  books.     The  four  grounds    denying  a 
on  which  a  bankrupt  could  be  imprisoned  in  g 

accordance  with  the  provisions  of  the  House  Bill  were 
changed  to  two  by  the  conference  committee:  (1) 
concealing  property  from  the  trustee;  and  (2)  committing 
perjury  by  making  a  false  statement. 

The  law  which  passed  both  Houses  of  Congress  and 
was  signed  by  the  President,  July  1,  1898  defines  courts 
of  bankruptcy  as  follows:  the  District  Courts 
of  the  United  States  in  the  several  states,  the    bank_ 
Supreme  Court  of  the  District  of  Columbia,    ruptcy 
the  district  courts  of  the  several  territories,    provided 
and  the  United  States  Courts  in  the  terri-    ^.g 
tories.     The  courts  have  the  power  to  try 
and  to  punish  bankrupts  or  to   discharge  them,   "to 
confirm   or   reject   compositions   between   debtors   and 
creditors,"  to  appoint  receivers  or  marshals  to  take  charge 
of  the  property  of  bankrupts  upon  application  of  those 
interested,  and  to  authorize  them  or  trustees  to  manage 
the  property   for  limited  periods  in  the  best  interests 
of  the  estate,   and  "to  cause  the  estates  of  bankrupts 
to  be  collected,  reduced  to  money,  distributed,  etc." 

Any  one  of  five  acts  makes  a  man  a  bankrupt:  (1) 
Concealing    or   removing    his   property   with  intent  to 

1  Congressional  Record,  Vol.  31,  Part  7,  p.  6296,  Fifty-fifth  Con- 
gress, second  session. 


322  MERCANTILE  CREDIT 

defraud  his  creditors;  (2)  While  insolvent  transferring 
his  property  with  intent  to  prefer  creditors;  (3)  While 
A  t  which  ins°lvent  permitting  a  creditor  to  obtain  a 
made  a  preference  through  legal  proceedings  without 
debtor  a  having  discharged  such  preference  at  least 
an  up  .  gve  ^ayg  before  a  final  disposition  of  any 
property  affected;  (4)  Making  a  general  assignment  for 
the  benefit  of  his  creditors;  (5)  "Admitting  in  writing 
his  inability  to  pay  his  debts  and  his  willingness  to 
be  adjudged  a  bankrupt  on  that  ground."1 

Only  the  first  three  of  the  five  acts  come  under  the 
head  of  involuntary  bankruptcy.  Under  this  act  a  per- 
son is  not  considered  insolvent  if  the  aggre- 
When  gate  of  his  property,  exclusive  of  that  which 

debtor  be  Bas  been  concealed  or  conveyed  with  fraudu- 
made  an  lent  intent,  is  sufficient  in  amount  to  pay  his 
involun-  debts.  A  fraudulent  act  of  itself  does  not 
bankrupt  ma^e  a  man  a  bankrupt.  Even  when  dis- 
honesty is  established,  if  the  alleged  bankrupt 
proves  his  solvency  under  the  above  conditions  the  case 
must  be  dismissed,  and  the  costs,  including  the  fees  of 
the  attorney  of  the  defendant,  must  be  borne  by  those 
who  bring  the  suit.  To  insure  the  payment  of  expenses, 
the  petitioner  must  file  a  bond  sufficient  to  cover 
costs. 

Any  one  except  a  corporation  may  become  a  voluntary 
bankrupt,  and  any  one  except  a  wage  earner  and  a  farmer 
may  be  forced  into  bankruptcy.  State  or  national 
banks  cannot  be  adjudged  bankrupts. 

1  See  Amendments  to  the  Act  of  1898. 


BANKRUPTCY  ACT  OF  1898  323 

The  bankrupt  is  required  to  attend  the  first  meeting 
of  his  creditors,  and  he  must  "  submit  to  an  examination 
concerning  the  conduct  of  his  business,  the    ^hat  a 
cause  of  his  bankruptcy,  the  amount,  kind,    bankrupt 
and   whereabouts   of   his   property,    and   all    is  required 
matters  which  may  affect  the  settlement  of 
his  estate."1     He  is  also  required  to  obey  all  other  law- 
ful orders  of  the  court,  examine  the  correctness  of  all 
claims  filed  against  his  estate,  and  notify  his  trustee  as 
soon  as  he  learns  of  any  attempt  of  creditors  to  evade 
the  provisions  of  the  Act. 

A  bankrupt  may  offer  terms  of  composition  to  his 
creditors,  after  he  has  been  examined  in  open  court,  at  a 
meeting  of  his  creditors,  and  after  he  files  a 
schedule  of  his  property  and  a  list  of  his  cred-  ymleSes 
itors,  which  the  law  requires.  The  bankrupt  bankrupt, 
may  apply  for  the  confirmation  of  a  composi- 
tion when  this  application  has  been  accepted  in  writing 
by  a  majority  of  his  creditors  representing  a  majority 
of  accounts  against  him.  The  court  is  required  to  con- 
firm a  composition  when  it  feels  that  it  is  to  the  best 
interests  of  the  creditors,  and  it  is  satisfied  that  the  bank- 
rupt is  not  guilty  of  an  act  which  would  prevent  his  dis- 
charge. After  one  month  and  within  twelve  months 
after  being  adjudged  a  bankrupt,  a  person  may  apply  to 
the  court  for  a  discharge.  When  the  court  has  given  all 
opposed  to  the  discharge  a  reasonable  opportunity  to 
testify,  it  must  discharge  the  applicant  if  it  is  satisfied 
that  he  has  not  committed  an  offense  punishable  with 

1  United  States  Bankruptcy  Law,  1898,  Ch.  3,  Section  7. 


324  MERCANTILE  CREDIT 

imprisonment  or  concealed  his  financial  condition  with 
fraudulent  intent  and,  "in  contemplation  of  bankruptcy, 
destroyed,  concealed,  or  failed  to  keep  books  from  which 
his  true  condition  might  be  ascertained." 

The  bankruptcy  law  does  not  modify  in  the  least  the 
exemption  laws  of  the  states. 

Courts  of  bankruptcy  are  required  to  appoint  a  suffi- 
cient number  of  referees  so  that  each  county  may  "con- 

_    ,  stitute  at  least  one  district"  when   the    ser- 

Each 

county  an     vices  of  a  referee  are  needed.     In  the  absence 

adminis-  of  a  judge  of  bankruptcy,  referees  have  all  the 
trative  powers  of  judges  except  the  right  to  pass  on 

the  application  of  bankrupts  for  composi- 
tions and  discharges. 

The  creditors  of  a  bankrupt  estate  at  their  first  meet- 
ing may  appoint  one  or  three  trustees  to  manage  the 

_  estate.     When  the  creditors  do  not  appoint  a 

Trustees; 

their  trustee,  the  court  is  required  to  do  so.     The 

duties  and    trustees  may  be  either  individuals  competent 

compen-       ^Q  ac^  as  trustees,  or  corporations  which  are 

s  3.  f"i  o  n 

permitted  either  by  their  charters  or  by  law 
to  act  in  this  capacity.  The  chief  duties  of  the  trustees 
are  to  control  the  estates  in  question,  reduce  the  prop- 
erty to  money,  keep  full  accounts,  and  set  apart  the  bank- 
rupt's exemptions,  dividends,  etc.  Trustees1  may  be 
allowed  by  courts  "not  to  exceed  3  per  cent,  on  the  first 
$5,000  or  less,  2  per  cent,  on  the  second  $5,000  or  part 
thereof,  and  1  per  cent,  on  such  sums  in  excess  of  $10,000."2 

1  Changed  by  the  Amendment  of  1903. 

2  United  States  Bankruptcy  Law,  1908,  Ch.  5,  Section  48. 


BANKRUPTCY  ACT  OF  1898  325 

An  important  provision  of  the  law  is  the  prevention 

of  preferences.     Under  this  Act  a  debtor  shall  be  deemed 

to  have  given  a  preference  if,  while  insolvent, 

he  has  permitted  or  given  a  judgment  against    Prefer" 
,.         ,.  .  .         ,  ences  pre- 

himself  to  some  creditor,  or  transferred  prop-    vented. 

erty  to  the  latter,  the  effect  of  which  will  be 
to  enable  some  creditor  or  creditors  to  receive  a  larger 
percentage  of  his  debt  than  other  creditors.  If  a  debtor 
gives  a  preference  within  four  months  before  the  filing 
of  a  petition,  or  after  the  filing  of  the  petition  and  be- 
fore he  is  adjudged  a  bankrupt,  and  the  person  receiving 
it  has  reason  to  believe  that  it  was  intended  as  a  prefer- 
ence, the  trustee  will  have  power  to  collect  the  value  of 
the  property  from  the  one  so  preferred. 

All  taxes  or  debts  "owing  by  the  bankrupt  to  the 
United  States,  state,  county,  district  or  municipality" 
must  be  paid  out  from  the  proceeds  of  the  Debts 
estate  before  any  dividends  are  paid  to  cred-  which 
itors.  The  debts  which  have  a  preferred  nave 
claim  to  the  assets  of  a  bankrupt  have  priority  pnonty. 
in  the  following  order:  (1)  The  cost  of  preserving  the 
estate  after  the  filing  of  the  petition;  (2)  "the  filing  fees 
paid  by  creditors  in  involuntary  cases;  (3)  the  cost  of 
the  administration  of  the  estate,  including  reasonable 
fees  to  an  attorney  for  the  bankrupt  in  both  involuntary 
and  voluntary  cases;  (4)  wages  due  workmen,  not  to 
exceed  $300  for  each  person,  which  were  earned  within 
three  months  prior  to  the  commencement  of  proceedings; 
(5)  debts  owing  to  any  person  which  by  the  laws  of  the 
states  or  the  United  States  are  entitled  to  priority." 


326  MERCANTILE  CREDIT 

The  Torry  Bankruptcy  Bill  was  first  introduced  in 
Congress  in  1890  and  was  presented  to  each  succeeding 
congress  until  the  law  of  1898  was  passed, 
trasted  ^e  same  se*  °^  circumstances  which  were 
interests  responsible  for  former  bankruptcy  laws  de- 
of  debtors  termined  this  law.  The  United  States  had 
...  gone  through  a  period  of  industrial  depression 

from  1893  to  1898,  and  hundreds  of  business 
concerns  which  had  heretofore  been  prosperous  were  now 
bankrupts.  As  insolvents  desire  a  law  which  will  dis- 
charge them  from  their  debts,  a  very  different  demand  was 
made  for  the  passage  of  a  bankrupt  law  near  the  closing 
years  of  the  panic  than  when  the  Torry  Bill  was  first 
introduced  in  1890.  Debtors  are  naturally  in  favor  of 
a  voluntary  bankrupt  law,  which  will  enable  those  who 
cannot  pay  their  debts  to  go  into  bankruptcy  and  get  a 
discharge  from  their  obligations.  The  creditors,  upon 
the  other  hand,  are  primarily  interested  in  an  involuntary 
law,  since  through  it  credit  may  be  maintained  on  a  high 
plane;  they  are  interested  in  a  voluntary  law  only  to 
the  extent  that  they  desire  the  burdens  lifted  from  the 
shoulders  of  honest  debtors.  The  Torry  Bill,  since  it 
was  constructed  by  business  interests  for  the  purpose  of 
elevating  the  plane  of  commercial  credit,  was  supported 
mainly  by  commercial  bodies  in  all  sections  of  the 
country.  The  Bill  which  finally  passed  was  the  result 
of  a  struggle  between  the  friends  of  the  voluntary  bank- 
ruptcy law  and  those  of  the  involuntary  and  was  conse- 
quently a  compromise  measure. 

The  chief  opponents  of  the  Torry  Bill  were  the  fol- 


BANKRUPTCY  ACT  OF  1898  327 

lowing:  (1)  The  older  business  men  who  had  had  experi- 
ence with  the  bankruptcy  law  of  1867,  and  as  a  result 
of  that  experience  were  convinced  of  the  im-    c^f 
practicability  of   any  national   law;  (2)  the    opponents 
larger  business  houses,  which  on  account  of    of  the 
their  organization  are  in  favor  of  the  granting 
of  preferences.     (They  have  credit  agents  in  all  sections 
of  the  country  who  have  an  accurate  knowledge  of  the 
financial  status  of  the  customers  of  the  House.     They 
know  how  much  credit  to  give  and  the  conditions  under 
which  credit  should  be  granted.     It  is  doubtful  if  such 
business  concerns  could  be  aided  by  a  National  Bank- 
rupt  Act  which  rigidly  forbids  preferences.)      (3)   the 
bankrupts    and    those    primarily  interested  in   having 
bankrupts  discharged. 

From  1879  to  1906  there  were  171,389  failures,  repre- 
senting liabilities  of  nearly  three  billion  dollars.  In  the 
debates  in  Congress  the  condition  of  these  unfortunates 
was  vividly  portrayed,  and  a  vigorous  appeal  was  made 
to  pass  a  voluntary  bankruptcy  act  which  would  enable 
these  bankrupts  to  be  discharged  at  once.  To  a  certain 
extent  the  question  was  also  made  a  sectional  one.  The 
chief  advocates  of  the  voluntary  measures  were  from  the 
South  and  the  Mississippi  Valley  section  of  the  West. 
In  the  House  the  only  sections  which  registered  a  major- 
ity vote  against  the  Henderson  Bill  were  the  South 
and  the  states  of  the  North  in  immediate  proximity  to  the 
Mississippi  river. 

The  law  is  strong  in  its  administrative  features,  and  for 
this  reason  it  has  been  saved  from  repeal.     It  provides 


328  MERCANTILE  CREDIT 

for  a  bankruptcy  court  in  every  county  in  the  United 
States,  and  on  this  account  the  opposition  to  the  former 

laws  because  of  the  inconveniences  and  costs 
Elements  Qf  attending  the  national  courts  has  disap- 
in  the  law.    peared.     The  functions  of  the  trustees  and 

referees  are  clearly  stated,  and  their  fees 
are  limited.  The  closing  up  of  estates  is  put  in  the 
hands  of  creditors,  and  as  the  fees  of  officials  cannot  be 
collected  until  all  the  business  affairs  are  settled  the 
best  inducement  is  offered  to  settle  estates  as  early 
as  possible. 

One  of  the  fundamental  defects  of  the  law  was  the 
definition  of  bankruptcy  it  introduced.     Under  this  Act 

a  person  is  not  considered  insolvent  when  the 
swea        aggregate  of  his  property,  exclusive  of  any 

property  which  he  "may  have  conveyed  or 
concealed  with  intent  to  defraud,  hinder,  or  delay  his 
creditors,"  shall  not  at  a  fair  valuation  be  sufficient  in 
amount  to  pay  all  his  debts.  This  definition  of  insol- 
vency is  different  from  any  previous  definition  of  the  time. 
Ordinarily  an  insolvent  is  one  who  cannot  pay  his  debts 
when  they  mature,  or  one  whose  liabilities  exceed  his 
assets.  If  solvency  is  proved  by  the  alleged  bankrupt 
at  the  time  an  action  to  make  him  a  bankrupt  is  taken, 
in  the  great  majority  of  instances  the  case  must  be 
dismissed,  and  the  costs  involved,  including  attorneys' 
fees  of  the  defendant  must  be  borne  by  those  who  bring 
the  suit.  In  this  we  see  clearly  the  handwriting  of  the 
debtor  classes. 

In  order  to  put  a  man  in  bankruptcy  petitioners  must 


BANKRUPTCY  ACT  OF  1898  329 

give  bond  to  indemnify  the  alleged  bankrupt  for  costs  in- 
curred if  they  fail  to  prove  their  case.  Under  the  law  of 
1867  the  creditors  took  no  risks.  With  this  law  the 
creditor  takes  all  risks,  the  burden  of  proof  is  imposed 
upon  him,  and  he  bears  the  costs  if  his  action  has  been 
hasty.  In  proving  fraud  everything  seems  to  depend  on 
the  intent  of  the  debtor,  and  the  whole  burden  of  proof  is 
with  the  creditor.  Even  if  fraud  is  proved  the  petitioner 
is  liable  for  damages  done  the  debtor  if  the  property  of 
the  latter,  aside  from  what  has  been  fraudulently  manip- 
ulated, is  adequate  to  pay  his  debts.  To  protect  the 
honest  debtor  the  law  shielded  the  dishonest,  and  it  did 
not  make  fraud  a  crime.  In  some  cases  it  was  necessary 
for  the  creditor  to  prove  that  the  debtor  kept  books  before 
the  latter  could  be  compelled  to  produce  them.  The 
involuntary  law,  the  one  most  desired  by  creditors  in  the 
interests  of  a  sound  credit  system,  was  thus  hedged  about 
by  so  many  limitations  as  to  make  it  at  times  of  doubtful 
value. 

A  good  involuntary  law  is  necessary  to  all  bankruptcy 
legislation.     Without  it  a  debtor  can  determine  when  he 

will  become  a  bankrupt,  and  in  his  liberty  to 

Advan- 
do  so  there  are  many  dangers.     He  could  sell    tages  of  a 

his  property  in  bulk,  transfer  it  as  he  pleased,    good  in- 
permit  liens  on  his  estate  to  secure  preferences,    voluntary 
and   then   await   a   sufficient   lapse   of   time 
before  announcing  his  desire  to  have  a  bankrupt's  priv- 
ileges, to  shield  his  fraudulent  conduct  from  a  bankruptcy 
court.     With  a  good  involuntary  bankruptcy  law  the 
conduct  of  the  debtor  is  checked,  for  if  he  is  guilty  of 


330  MERCANTILE  CREDIT 

fraud  he  does  not  know  at  what  time  action  may  be 
taken  against  him,  and  a  bankruptcy  court  may  be 
called  on  to  pass  judgment  upon  his  methods.  A  well- 
balanced  law  ought  to  protect  creditors  from  fraud  as 
well  as  debtors  from  oppression,1  and  one  of  the  defects 
of  this  original  law  consists  in  erecting  barriers  to  prevent 
the  prosecution  of  dishonest  debtors. 

Preferences  are  strictly  prohibited  by  the  law.     Any 

judgment  which  is  procured  or  permitted  to  be  made  in 

favor  of  any  one  while  the  debtor  is  insolvent, 

Prefer-        ^e  effect  of  which  will  give  one  creditor  a 

ences  pre-  . 

vented.        larger  percentage  ol  his  debt  than  any  other 

person,  is  considered  a  preference;  also,  if  a 
bankrupt  gives  a  preference  within  four  months  before 
filing  a  petition  or  after  filing  the  application  and  before 
the  adjudication  of  the  estate,  the  property  or  its  value 
may  be  received  by  the  trustee.  The  latter  feature  has 
made  uncertain  the  work  of  the  credit  man.  All  liens 
secured  or  claims  obtained  against  a  debtor  depend  for 
their  validity  upon  the  probability  of  the  debtor's  going 
into  bankruptcy  within  four  months  from  the  date  of 
such  preferences.  Creditors  have  all  along  taken  their 
chances.  They  have  secured  preferences  in  the  same  way 
as  formerly,  and  have  taken  chances  on  having  to  surren- 
der their  claims.  Even  where  creditors  have  secured 
preferences,  they  have  often  been  debarred  from  taking 
action  against  debtors  for  further  claims,  since  by  doing 
so  they  would  be  compelled  to  surrender  the  advantages 

1  The  law  has  been   greatly  improved  in  these  respects   by 
amendments. 


BANKRUPTCY  ACT  OF  1898  331 

already  secured.  A  man  who  had  a  claim  secured  for 
$50,000  would  not  be  likely  to  take  action  to  obtain  the 
payment  of  a  debt  of  $25,000  if  by  doing  so  the  debtor 
would  be  forced  into  bankruptcy,  and  the  $50,000  would 
have  to  be  surrendered  to  be  equally  divided  between  all 
the  creditors. 

Under  the  law  of  1867  the  restrictions  upon  voluntary 
bankruptcy    were    very    stringent    and    discharge    was 
difficult.     Under  the  law  of  1898  discharge  is 
comparatively  easy.     But  two  things  prevent      . 
a  discharge:  (1)  An  offense  which  is  punish-    from 
able  by  imprisonment;1   (2)  failure   to  keep    bank- 
records  or  a  destruction  of  records  with  intent    ruP*cy 
to  commit  fraud.     Neither  a  fraudulent  prefer-  . 

ence  nor  the  sale  of  goods  in  bulk  will  prevent 
a  discharge.  A  failure  to  keep  books  or  a  destruction  of 
records  is  inadequate  to  prevent  a  discharge  unless  in 
doing  so  fraudulent  intent  can  be  proven.  If  a  debtor 
swears  to  his  true  condition,  gives  his  property  to  his 
creditors,  and  turns  his  estate  over  to  them,  he  must  be 
discharged.  Most  laws  both  abroad  and  at  home  make 
the  payment  of  a  certain  percentage  of  debts  a  condi- 
tion necessary  to  a  discharge.  Not  a  cent  needs  to  be 
turned  over  to  creditors  to  permit  a  discharge  if  it  can  be 
shown  that  the  debtor  has  no  more  property  than  the 
laws  of  the  state  permit  a  bankrupt  to  have. 

The  law  does  not  interfere  with  the  exemption  laws  of 
the  states.  In  this  respect  it  does  not  provide  for  the 
uniformity  which  credit  men  desire.     The  laws  of  the 

1  See  subsequent  amendments. 


332  MERCANTILE  CREDIT 

states  are  very  different  on  this  point.     Some  exempt  a 

certain   minimum  both   of  personal  property  and  real 

estate.     Others  leave  the  homestead  with  the 

Law  does     bankrupt  without   regard   to   its  value.     In 

not 

interfere       Texas  the  bankrupt  is  allowed  $5,000  for  the 

with  lot  upon  which  the  homestead  stands,  and  the 

exemption    nomestead  also  whatever  its  value  may  be. 

states  In  both  Wisconsin  and  Kansas  the  homestead 

is  exempt.  In  these  states  if  a  man  is  about 
to  become  a  bankrupt,  a  large  part  of  his  property  may 
be  put  in  a  homestead  and  his  creditors  have  no  recourse. 
To  give  credit  with  safety,  the  credit  man  must  have  a 
knowledge  of  the  homestead  laws  of  the  various  states, 
and  consequently  different  practices  must  be  followed  by 
credit  men  in  giving  credit. 

With  all  its  defects  the  friends  of  national  bankruptcy 
legislation  believed  that  it  was  superior  to  the  insolvency 
legislation  of  the  various  states. 

The  amendments  to  the  Act  of  1898,  approved  Febru- 
ary 5,  1903,  were  attempts  to  correct  shortcomings  which 

experience  in  putting  the  law  into  practice 
Amend-  proved  to  exist.  To  the  two  causes  prevent- 
1903.  mS  the  discharge  of  a  bankrupt  four  others 

were  added:  (l)  Securing  property  upon  a 
written  false  statement  to  secure  credit;  (2)  transferring 
or  concealing  property  four  months  prior  to  the  filing  of 
a  petition  in  bankruptcy  with  intent  to  defraud  creditors; 
(3)  having  been  granted  a  discharge  in  voluntary  bank- 
ruptcy within  six  years;  (4)  refusing  to  obey  any  of  the 
orders  of  the  court  during  bankruptcy  proceedings. 


BANKRUPTCY  ACT  OF  1898  333 

Another  amendment  gives  creditors  power  at  a  meet- 
ing for  the  purpose  of  examining  a  bankrupt  to  examine  the 
wife  of  a  bankrupt  on  matters  concerning  business  trans- 
acted by  her,  to  determine  if  she  has  "been  a  party  to  any 
business  of  the  bankrupt."  This  amendment  is  of  value 
in  all  cases  where  the  husband  keeps  his  property  in  his 
wife's  name,  pretending  to  act  as  her  agent.  Any  other 
person  may  be  called  before  the  court  to  be  examined 
with  reference  to  his  business  relations  with  the  bankrupt. 

The  fees  received  by  trustees  were  changed  by  another 
amendment  to  the  law.  Aside  from  the  fee  allowed  by 
the  court  when  the  petition  in  bankruptcy  is  filed,  trus- 
tees may  be  allowed  commissions  on  all  disbursements 
made  by  them  not  "to  exceed  6  per  cent,  on  the  first  $500 
or  less,  4  per  cent,  on  all  sums  in  excess  of  $500  and  less 
than  $1,500,  2  per  cent,  on  moneys  in  excess  of  $1,500  and 
less  than  $10,000,  and  1  per  cent,  on  moneys  in  excess  of 
$10,000." 

Many  other  amendments,  not  of  a  radical  character  yet 
essential  in  strengthening  weak  points  in  the  law,  were 
passed.  The  amendments  of  the  Act  of  June,  1906,  were 
all  of  a  minor  character. 

In  each  of  the  last  three  years— 1908,  1909,  and  1910— 
bills  have  been  before  Congress  to  amend  the  National 
Bankruptcy  Act  for  the  purpose  of  making  it 
more    satisfactory    to    creditors.     The    bill    Pr°Pose 

mcflsurc 

introduced  in  1908  by  Congressman  Sherley    0f  1908. 
of  Kentucky,  was  framed  at  a  conference  of 
representatives  of  the  National   Bar   Association,   the 
National  Association  of  Credit  Men,  the  National  Board 


334  MERCANTILE  CREDIT 

of  Trade,  the  Merchants'  Association  of  New  York,  and 
the  Commercial  Law  League  of  America.  It  was  con- 
sidered too  radical  a  measure  and  was  defeated.  In  1909 
a  bill  somewhat  less  radical,  also  introduced  by  Congress- 
man Sherley,  passed  the  House  but  was  not  reported  out 
from  the  committee  of  the  Senate  to  which  it  had  been 
consigned,  and  was  consequently  defeated. 

Some  very  important  amendments  were  passed  in  1910. 
One  of  the  most  important  regulated  the  compensation 
of  receivers  and  trustees.  It  was  claimed  that 
Amend-  ^00  much  0f  the  assets  of  estates  were  absorbed 
1910  ky   these   officials,    the   courts   holding   that 

limited  they  had  unlimited  discretion  in  their  allow- 
compen-  ances  t0  these  assets.  Neither  the  law  of  1898 
ffi  .     nor  the  amendments  of  1903  and  1906  at- 

court.  tempted  to  limit  the  fees  of  receivers,  and  in 

practice  they  received  more  for  their  services 
than  trustees  both  when  they  were  mere  custodians  of  an 
estate  for  a  week  or  two  and  when  they  had  charge  of 
an  estate  conducting  the  business  for  several  months. 
The  amendments  reduced  the  compensation  of  all  the 
officers  to  commissions,  which  varied  with  the  amounts  in- 
volved and  were  computed  upon  the  actual  cash  realized 
by  creditors.  The  maximum  amount  which  could  be 
paid  officials  was  stipulated,  the  courts  having  power  to 
allow  less  if  they  chose  to  do  so. 

Trustees  were  allowed  a  fee  of  five  dollars  when  the 
petition  was  filed  except  when  a  fee  is  not  required  of  a 
voluntary  bankrupt.1     Trustees,  receivers,  and  marshals 

1  Section  48  of  Act. 


BANKRUPTCY  ACT  OF  1898  335 

were  to  receive  a  commission  on  all  moneys  disbursed  or 
turned  over  to  any  person  "not  to  exceed  6  per  cent,  on 
the  first  $500  or  less,  4  per  cent,  on  moneys  in  excess  of 
$500  and  less  than  $1,500,  2  per  cent,  on  moneys  in  excess 
of  $1,500  and  less  than  $10,000,  and  1  per  cent,  on  moneys 
in  excess  of  $10,000. M1 

In  the  case  of  the  confirmation  of  a  composition,  the 
trustee,  receiver  or  marshal  may  be  allowed  by  the 
court  commissions  not  to  exceed  1/2  per  cent,  of  the 
amount  to  be  paid  creditors.  It  is  further  stipulated 
that  when  the  receiver  or  marshal  acts  as  a  mere  custo- 
dian, and  does  not  carry  on  the  business  of  the  bankrupt 
he  shall  not  receive  "more  than  2  per  cent,  on  the  first 
$1,000  or  less,  and  1/2  per  cent,  on  all  above  $1,000 
on  moneys  disbursed  by  him  or  turned  over  by  him 
to  the  trustee  and  on  moneys  subsequently  realized 
from  property  turned  over  by  him  in  kind  to  the 
trustee."2  Before  any  allowance  is  made  a  notice 
must  be  given  to  the  creditors  specifying  the  amount 
requested. 

Another  section  of  the  Act  was  amended  so  that  re- 
ceivers, marshals  or  trustees  could  be  authorized  to  con- 
duct business  of  bankrupts  for  limited  periods.  In  such 
cases  the  maximum  compensation  which  can  be  allowed 
them  by  courts  is  fixed  at  "  6  per  cent,  on  the  first  $500  or 
less,  4  per  cent,  on  moneys  in  excess  of  $500  and  less  than 
$1,500,  2  per  cent,  on  moneys  in  excess  of  $1,500  and  less 
than  $10,000,  and  1  per  cent,  on  moneys  in  excess  of 

1  Section  48  of  Act. 

2  Section  48— d. 


33G  MERCANTILE  CREDIT 


^OOO."1  In  case  of  the  confirmation  of  a  composi- 
tion the  commissions  cannot  exceed  1/2  per  cent,  of  the 
amount  paid  creditors. 

Another  amendment  increased  the  power  of  trustees, 
giving  them  control  over  "all  property  in  the  custody 
or  coming  into  the  custody  of  the  bank- 
Powers  of  rUptcy  court,"2  and  vesting  in  them  "all  the 
trustees 
increased,    rights,   remedies,   and  powers   of   a   creditor 

holding  a  lien  by  legal,  or  equitable  proceed- 
ings; and  also,  as  to  all  property  not  in  the  custody  of 
the  bankruptcy  court,  shall  be  deemed  vested  with  all  the 
rights,  remedies,  and  powers  of  a  judgment  creditor 
holding  an  execution  duly  returned  unsatisfied." 

The  purpose  of  this  amendment  was  to  give  the  trustee 
the  same  right  which  any  creditor  would  have  if  bank- 
ruptcy proceedings  had  not  been  instituted.  A  decision 
of  the  Supreme  Court  in  the  case  of  York  vs.  Cassell, 
held  that  the  title  of  a  trustee  is  simply  that  of  a  debtor, 
and  that  he  has  no  more  power  than  the  bankrupt  had. 
It  held  that  if  the  bankrupt  cannot  set  aside  a  transfer 
the  trustee  cannot  do  so  because  he  has  no  more  power 
than  the  bankrupt  has.  The  effect  of  this  decision  was 
to  prevent  the  creditors  from  setting  aside  a  conveyance 
or  preventing  the  evils  of  secret  liens,  because  when  the 
bankruptcy  court  took  possession  of  the  property  the 
creditors  were  no  longer  free  to  act. 

Another  amendment  makes  it  possible  for  the  bank- 
rupt to  offer  terms  of  composition  to  his  creditors  after 

1  Division  E.,  Section  48. 

2  Section  47. 


BANKRUPTCY  ACT  OF  1898  337 

he  has  been  examined  in  open  court  or  at  a  meeting  of 

the  creditors,   and  after  he  has  filed  a  schedule  of  his 

property  and  a  list  of  his  creditors.     When  a 

.,         r  i  .  •,.,  ,.  Composi- 

majonty  of  his  creditors  representing  a  ma-    ^ 

jority  of  the  claims  against  him  accept  his 
terms,  he  may  apply  for  the  confirmation  of  a  composi- 
tion which  the  court  is  required  to  grant  when  it  is 
convinced  that  such  action  is  in  the  interest  of  creditors 
and  that  the  bankrupt  is  not  guilty  of  an  offense  which 
would  prevent  his  discharge.  Although  it  is  possible  for 
a  debtor  to  make  a  composition  with  his  creditors  under 
the  common  law,  under  this  bankruptcy  statute  a  com- 
position agreed  to  by  a  majority  in  number  and  amount 
of  the  creditors  and  approved  by  the  court,  is  binding  on 
all  creditors,  even  including  those  who  do  not  agree  to  it. 
Settlements  by  composition  have  the  merit  often  of 
freeing  from  the  stigma  of  bankruptcy  one  who  is  in- 
solvent, of  providing  for  a  quick  settlement,  and  of  giving 
creditors  in  most  instances  larger  shares  than  they  would 
receive  by  regular  bankruptcy  proceedings. 

The  amendment  of  1874  to  the  law  of  1867  provided 
for  compositions  both  before  and  after  adjudication  in 
bankruptcy.  The  English  Bankruptcy  Act  of  1890  per- 
mits compositions  of  creditors  with  debtors  under  the 
supervision  of  the  court,  and  these  official  settlements 
have  become  common  in  England.  They  have  the 
merit  (1)  of  making  speedy  settlements  between  debtors 
and  creditors,  (2)  of  preventing  the  creditor  from  being 
stigmatized  as  a  bankrupt,  and  (3)  of  reducing  court 
expenses  for  the  administration  of  an  estate. 


338  MERCANTILE  CREDIT 

By  the  law  of  1898  any  person  who  owed  debts  except 

a  corporation  could  become  a  voluntary  bankrupt.     An 

amendment    of    1910   gives  all    corporations 
Corpora-  .... 

tions  may     except  public  and  quasi-public  corporations 

become  the  privilege  of  voluntary  bankruptcy.  "Any 
voluntary  person,  except  a  municipal,  railroad,  insurance, 
or  banking  corporation,  shall  be  entitled  to 
the  benefits  of  this  act  as  a  voluntary  bankrupt."1 
The  extension  of  the  voluntary  provisions  to  corpora- 
tions was  seriously  objected  to  by  the  opponents  of  the 
law.  Corporations  are  formed,  they  argued,  so  that 
individuals  may  restrict  their  liability  or  be  free  from 
liability  altogether.  Why  should  we  enlarge  the  op- 
portunity, they  urged,  for  people  to  free  themselves  from 
the  payment  of  their  just  debts? 

Another  amendment  is  very  explicit  with  reference 
to  corporations  that  may  be  made  involuntary  bank- 
Corpora-  ruPts-  I*  states  that  "  any  moneyed,  business 
tions  as  in-  or  commercial  corporation,  except  a  munici- 
voluntary  pa^  railroad,  insurance,  or  banking  corpora- 
an  rupts.  t.on  owing  debts  of  Si, 000  or  over,  may  be 
judged  an  involuntary  bankrupt."2  The  same  cor- 
porations may  be  made  involuntary  bankrupts  that 
have  the  right  of  voluntary  bankruptcy.  Prior  to  this 
only  those  corporations  which  were  "engaged  principally 
in  manufacturing,  trading,  printing,  publishing,  mining 
or  mercantile  pursuits  could  be  made  involuntary  bank- 
rupts."    In   differentiating   between   these   and   other 

1  Division  a,  Section  4. 

2  Division  b,  Section  4. 


BANKRUPTCY  ACT  OF  1898  339 

corporations  many  anomalous  distinctions  were  made  by 
the  courts  in  determining  what  are  trading  corporations, 
or  corporations  engaged  in  mercantile  pursuits.  Laun- 
dry companies,  livery  stables,  mercantile  agencies, 
hotels,  and  companies  which  construct  bridges  and  piers, 
etc.,  have  been  by  different  courts  included  and  excluded 
from  the  class  of  corporations  which  come  within  the 
province  of  the  involuntary  bankruptcy  law.  It  was 
chiefly  for  the  purpose  of  avoiding  confusion  resulting 
from  diverse  decisions  of  the  courts  that  an  attempt  was 
made  to  substitute  a  logical  for  an  arbitrary  classifica- 
tion of  corporations. 

The  law  excluding  wage  earners  and  farmers  from 
the  provisions  of  involuntary  bankruptcy  remained 
unchanged. 

The  original  law  governing  the  discharge  of  bank- 
rupts was  strengthened  by  the  amendments  of  1903. 
A  new  amendment  was  added  in  1910.  A  trustee  is 
given  the  power  of  opposing  the  discharge  of  a  bankrupt 
when  he  is  authorized  to  do  so  at  a  meeting  of  creditors 
called  for  the  purpose.  The  expenses  incurred  by  the 
trustee  are  borne  by  the  estate  and  are  thus  distributed 
among  the  creditors,  whereas  heretofore  any  creditor 
who  opposed  the  discharge  of  a  bankrupt  was  compelled 
to  do  so  at  his  own  expense. 

In  the  section  pertaining  to  the  filing  and  dismissing 
of  petitions  it  was  provided  in  the  former  law  that  "a 
voluntary  or  involuntary  petition  shall  not  be  dismissed 
by  the  petitioner  or  petitioners  for  want  of  prosecution 
or  by  consent  of  parties  until  after  notice  to  the  cred- 


340  MERCANTILE  CREDIT 

itors."  But  no  provision  was  made  to  notify  the  cred- 
itors other  than  the  petitioners,  since  the  court  had  no 
The  filing  means  of  knowing  the  names  of  the  other 
and  dis-  creditors.  The  practice  was  common  in  many 
missing  of  districts  of  dismissing  involuntary  petitions 
by  request  of  the  bankrupt,  after  the  consent 
of  the  petitioners  was  secured.  In  some  cases  courts 
of  bankruptcy  have  been  used  as  a  means  of  giving 
preferences  by  having  proceedings  dismissed  after  the 
petitioning  creditors  were  paid  in  full.  An  amendment 
to  the  above  clause  prevents  this  abuse  since  the  court 
must,  "before  entertaining  an  application  for  dismissal, 
require  the  bankrupt  to  file  a  list,  under  oath,  of  all  his 
creditors,  with  their  addresses,"  so  that  the  intent  of 
the  law  can  be  carried  out  by  actually  notifying  all  the 
creditors  of  the  petition  for  a  dismissal. 

Another  paragraph  is  added  to  the  division  on  Pre- 
ferred Creditors.  It  makes  more  definite  the  matter  of 
preferences  where  the  instrument  of  transfer  must  be  re- 
corded. If  the  registry  of  transfer  is  made  within  four 
months  before  the  filing  of  the  petition  in  bankruptcy, 
and  the  bankrupt  is  insolvent,  and  if  the  transfer  operate 
as  a  preference  and  the  person  benefited  by  it  has 
grounds  to  believe  that  the  transfer  is  in  effect  a  prefer- 
ence, it  is  within  the  power  of  the  trustee  to  recover  the 
property.  In  this  case  the  amendment  dispenses  with 
the  requirement  of  proof  that  the  debtor  intended  to 
give  a  preference,  a  thing  which  is  always  difficult  to 
prove. 

The  Bill  introduced  in  1908  was  very  carefully  drawn 


BANKRUPTCY  ACT  OF  1898  341 

and  became  the  model  for  the  measures  submitted  in 

1909  and  1910.     Some  concessions  were  made  to  those 

who  opposed  bankruptcy  legislation,  and  con-    T, 

sequently  some  provisions  deemed  very  im-    proposed 

portant    were    not    included    in    the  amend-    measure 

ments  of  1910.     One  of  these  sections  modi- 

more 
fies  the  definition  of  insolvency  so  that  a  person    radical 

would  become  insolvent  when  the  aggregate    than  the 

of  his  property,  exclusive  of  that  "which  is    law  which 

D3.SS6(1 

exempt  from  being  taken  on  execution 
under  the  laws  of  the  United  States  or  of  the  state  or 
territory  in  which  the  proceedings  in  bankruptcy  were 
begun,"  is  inadequate  at  a  fair  valuation  to  pay  his 
debts.  The  property  excluded  from  valuation  as  a  part 
of  the  assets  of  the  debtor  under  the  present  law,  is  that 
which  has  been  concealed,  conveyed,  etc.,  with  intent 
to  defraud.  The  necessity  of  inserting  the  additional 
clause  was  made  obvious  in  the  litigation  of  cases  in 
states  which  have  liberal  exemption  laws.  The  opposi- 
tion to  this  clause  was  so  strong  that  it  was  struck  out 
of  the  Bill  proposed  in  1909,  and  it  failed  to  pass  as  one 
of  the  amendments  of  the  Act  of  1910.  The  justice  of 
the  proposed  change  in  determining  insolvency  cannot  be 
called  in  question  since  the  alleged  bankrupt  should  have 
an  adequate  amount  of  property  to  pay  his  debts,  which 
would  be  divided  in  case  of  bankruptcy  among  his 
creditors. 

Another  amendment  proposed  in  the  Act  of  1908,  but 
which  failed  to  pass  in  1910,  made  the  failure  to  account 
satisfactorily  "for  a  loss  or  deficiency  of  assets  which 


342  MERCANTILE  CREDIT 

contribute  to  his  bankruptcy"  an  objection  to  a  dis- 
charge. This  feature  is  new  in  bankruptcy  legislation, 
having  been  introduced  for  the  first  time  in  the  English 
Bankruptcy  Act  of  1890. 

Many  speeches  were  made  in  both  branches  of  Congress 
favoring  the  repeal  of  the  law.  Motions  to  repeal  the 
Attempt  ^aw  were  defeated  in  the  House  in  1909  by  a 
to  repeal      vote  of  182  to  111,  and  in  1910  by  a  vote  of 

law  of  166  to  90.     These  votes  practically  ended  the 

1898 

efforts  of  the  opponents  of  national  bank- 
ruptcy legislation  to  consign  the  law  of  1898  to  the  same 
fate  as  its  predecessors  met. 

The  arguments  in  opposition  to  the  Bankruptcy  Act, 

and  especially  to  the  amendments  to  it,  made  by  the 

minority  of  the  judiciary  committee  may  be 

summarized  under  the  following  heads:  (1) 
ments  f  v  ' 

against  The  proposed  amendments  are  in  the  inter- 
national      ests  of  organized  special  classes;  (2)  the  wide 

n  " ,  expanse  of  territory  gives  a  large  variety  of 
ruptcy  leg-    ...  .       . 

islation         industrial  and  commercial  interests  to  which 

when  Act  one  uniform  law  is  not  adapted;  (3)  the  costs 
of  1910  0f  ciosing  estates  under  a  national  Act  are 
pending.  greater  than  under  state  laws;  (4)  the  primary 
object  of  the  bankruptcy  law  is  to  relieve  un- 
fortunate debtors  from  the  weighty  oppression  of  debts 
impossible  for  them  to  pay,  and  the  proposed  amend- 
ments are  especially  hard  on  the  debtor  classes. 

The  proposed  amendments  were  urged  by  creditors  in 
behalf  of  creditors,  but  it  would  not  be  difficult  to  prove 
that  the  changes  contemplated  would  also  benefit  honest 


BANKRUPTCY  ACT  OF  1898  343 

debtors.     Opposition  to  the  law  seemed  to  be  aroused 

by  interests  independent  of  debtors  and  creditors  that 

would  profit  by  a  repeal  of  the  law. 

There  is  no  reason  why  one  uniform  bankruptcy  law 

would  not  apply  to  all  American  conditions  of  bankruptcy 

just  as  many  other  laws  on  the  statute  books     .  . 

Advan- 
apply   to   a   whole  set  of  conditions  of  one    tages  0f  a 

kind  or  another.     The  strong  argument  for  a    National 

National  Bankruptcy  Act  is  the  weakness  of    BankruPt 

Act* 
the  state  insolvency  laws,  which  are  in  opera- 
tion in  the  absence  of  a  national  statute.  Most  states 
have  no  laws  authorizing  the  involuntary  seizure  and  dis- 
tribution of  the  debtor's  property.  The  southern  states 
as  a  rule  and  many  of  the  western  states  as  has  been 
shown,  are  hostile  to  this  sort  of  legislation,  and  have 
consequently  opposed  the  passage  of  involuntary  laws  by 
the  United  States  Government.  Trade  and  commerce 
are  now  national  in  their  scope,  and  the  best  state  insol- 
vency laws  are  inefficient,  owing  to  their  limitations  to 
state  lines.  Such  laws  have  no  power  to  bind  property 
outside  of  a  state  or  to  relieve  a  debtor  of  his  obligation 
to  pay  in  full  his  creditors  residing  in  another  state; 
and  in  most  large  failures  the  debtor's  property  is  not 
wholly  in  one  state,  nor  do  all  his  creditors  reside  in 
one  state. 

It  has  not  been  and  perhaps  cannot  be  proved  that 
the  costs  of  closing  estates  under  the  National  Act  are 
greater  than  under  state  laws.  Much  may  be  said  in 
favor  of  the  contention  that  the  purpose  of  the  Act  of 
1898  was  to  relieve  debtors.     However,  the  fundamental 


344  MERCANTILE  CREDIT 

purpose  of  modern  bankruptcy  legislation  is  not  to  re- 
lieve debtors,  but  to  divide  the  estates  of  bankrupt 
debtors  equitably  among  creditors,  with  the  least  ex- 
pense, and  without  injury  to  honest  debtors. 


CHAPTER  XX 
STATE  INSOLVENCY  LEGISLATION 

The  inadequacy  of  state  insolvency  laws  has  all  along 
been  the  strong  argument  for  national  bankruptcy  legis- 
lation.    The  necessity  for  the  regulation  of    gan^_ 
trade  between  the  states  was  the  paramount    ruptcy  and 
argument  for  the  adoption  of  the  Constitu-    the  Con~ 
tion  of  the  United  States.     The  Union  was 
about  to  split  up  into  the  various  states  because  each 
had  its  own  way  of  regulating  commerce  between  itself 
and  other  states,  and  contentions  arising  from  unjust 
discriminations  frequently  led  to  the  verge  of  civil  war. 
As  a  part  of  this  movement  to  place  the  control  of  inter- 
state commerce  in  the  hands  of  the  national  government, 
the  constitution  conferred  on  the  general  government 
the  power  of  passing  bankrupt  laws. 

The  limitations  on  the  powers  of  the  states  in  their 
insolvency  legislation  proved  to  be  an  additional  reason 
for  the  assumption  of  this  power  by  the  gen- 
eral  government.     In  almost  every  large  fail-    insolvency 
ure  the  debtor's  property  is  not  wholly  within    laws  are 
one  state  nor  do  all  the  creditors  reside  in    inade- 
one  state.     The  insolvency  laws  of  a  state 
cannot  enable  a  debtor  to  be  discharged  from  the  pay- 
ment of  debts  owed  in  another  state.     Complete  dis- 

345 


346  MERCANTILE  CREDIT 

charge  is  thus  in  many  cases  impossible  of  attainment 
under  state  laws.  In  most  bankrupt  laws  and  in  the  in- 
solvency laws  of  many  of  the  states,  the  desires  of  a  cer- 
tain percentage  of  the  creditors  in  number  and  in  amount, 
bind  the  rest  with  reference  to  terms  on  which  estates  are 
closed.  But  under  the  insolvency  laws  of  a  state  no 
decision  of  the  creditors  of  a  debtor  of  that  state  can  bind 
creditors  residing  in  other  states. 

As  a  rule  the  state  laws  define  an  insolvent  as  one 
who  is  unable  to  pay  his  debts  as  they  mature  in  the  or- 
dinary  course   of   business.     All   that   have 
Definition     msoivenCy  laws  of  any  kind  provide  for  vol- 
insolvent.     untary  insolvency,  and  a  number  of  the  states 
provide  also  for  involuntary  insolvency. 
As  a  rule  in  voluntary  insolvency,  debtors  in  failing 
circumstances   may   apply  to  the   court  having  juris- 
diction, offering  to  surrender  their  property 

Voluntary     ^Q  ^Q  divided  among  their  creditors.     At  the 
insolvency      .  .....  , 

laws.  ^ime   °*   presenting  their  petition  or  subse- 

quently, they  are  required  to  give  the  names 
of  their  creditors,  their  places  of  abode,  the  amounts 
owing  each,  etc.  Usually  this  statement  is  made  under 
oath.  The  assignment  of  the  debtor's  property  does  not 
affect  that  which  under  the  laws  of  the  state  is  left  with 
insolvents.  In  some  states,  California,  Wisconsin, 
Nevada  and  Massachusetts,1  the  debtor  must  owe  a 
certain  sum  of  money  before  he  can  apply  for  the  bene- 
fits of  the  law. 

1  The  amount  required  in  California  and  Wisconsin  is  $300;  in 
Nevada  $500;  in  Massachusetts  $250,  and  in  Idaho  $300. 


STATE  INSOLVENCY  LEGISLATION       347 

Maine,  Vermont,  Massachusetts,  Rhode  Island,  Con- 
necticut, Maryland,  Minnesota,  Louisiana,  Nevada,  and 
California  have  involuntary  as  well  as  vol-  invoiun_ 
untary  insolvency  laws.  The  petition  to  tary 
make  a  debtor  a  bankrupt  must  be  filed  by  insolvency 
creditors  with  the  judge  of  the  local  court, 
charging  him  with  an  attempt  to  evade  the  payment  of  his 
just  debts.  The  debtor's  fleeing  from  the  state  where  he 
resides,  removing  his  property,  or  concealing  his  property 
with  the  apparent  intention  of  defrauding  his  creditors, 
preferring  creditors,  allowing  judgment  to  be  executed  in 
favor  of  creditors,  or  taking  action  in  contemplation  of  in- 
solvency, are  the  usual  conditions  which  give  creditors 
the  right  to  force  a  debtor  into  insolvency.  Some  officer 
of  the  court  takes  charge  of  the  debtor's  property,  a  meet- 
ing of  the  creditors  is  called,  at  which  the  debtor  may 
attend,  and  the  petitioning  creditors  are  required  to 
establish  one  or  more  of  the  above  charges  before  the 
court  can  act  favorably  on  their  petition.  With  a  few 
minor  differences  the  laws  of  the  various  states  with 
reference  to  involuntary  insolvency  are  similar.  Some 
states  require  the  petition  of  a  certain  number  of  the 
creditors,  and  others  require  the  owing  of  a  minimum 
debt,  as  requisite  to  involuntary  proceedings. 

After  the  petition  is  granted  the  methods  of    Method  of 

procedure 
procedure  in    both    voluntary    and    involun-    in  both 

tary   bankruptcy    are    practically  the  same,  voluntary 

The  debtor  must  furnish  to  the  court  under  and  in~ 

oath  a  list  of  his  creditors,  their  residence,  bank_ 

the  amounts  owing  each,  and  his  total  assets,  ruptcy. 


348  MERCANTILE  CREDIT 

At  a  meeting  of  the  creditors  called  by  the  court,  they 
are  required  to  prove  their  claims  against  the  debtor's 
estate,  and  those  proving  their  claims  elect  an  assignee 
or  assignees  to  take  charge  of  the  debtor's  property. 

In  most  of  the  states  a  double  majority  is  required,  that 
is,  a  majority  of  creditors  who  hold  claims  representing 
over  one-half  of  the  amounts  owed  by  the  debtor.  The 
assignee  possesses  the  same  privilege  with  reference  to 
the  debtor's  property  as  the  latter  would  enjoy  in  the 
absence  of  insolvency  proceedings.  He  collects  all  debts 
owed  the  debtor's  estate,  and  under  the  supervision  of 
the  court,  distributes  the  debtor's  property  equally  among 
the  creditors.  In  most  states  he  is  required  to  give  bond 
for  the  faithful  discharge  of  his  duties.  Some  states 
prescribe  conditions  under  which  he  may  be  removed. 
Some  states  prescribe  that  he  be  allowed  a  reasonable 
compensation  or  compensation  on  a  percentage  but  even 
under  the  common  law,  he  is  to  be  allowed  reasonable 
pay  for  his  services.  In  several  states  the  debtor  selects 
his  own  assignee.  When  making  an  assignment  in  In- 
diana1 and  Ohio2  the  debtor  may  select  his  own  trustee, 
unless  creditors  representing  over  one-half  of  his  debts 
object,  in  which  case  the  Circuit  Judge  chooses  the  trus- 
tee. In  Wyoming3  the  assignee  selected  by  the  failing 
debtor  must  give  adequate  notice  of  his  appointment  in 
newspapers  and  must  have  the  property  which  comes  in 
his  possession  appraised  by  two  trustees. 

1  Brown's  Annotated  Statutes  Review,  1208. 

*  Bates'  Annotated  Ohio  Statutes,  Vol.  2,  Section  3141-3167. 

1  Wyoming  Compiled  Statutes,  1910. 


STATE  INSOLVENCY  LEGISLATION      349 

In  some  western  states,  notably  Utah  and  Oklahoma,  a 
voluntary  assignment  for  the  benefit  of  creditors  is  void 
under  the  following  conditions:  (1)  if  a  prefer- 
ence is  granted  on  a  contingency;  (2)  if  it  tends    . 
to  coerce  a  creditor  to  release  or  compromise    solvency 
his  demand;  (3)  if  it  provides  for  the  payment    in  Utan 
of  a  claim  known  to  be  false;  (4)  if  it  reserves    . 
any  interest  to  the  debtor  not  allowed  by  state 
laws  before  the  debts  are  paid; (5) if  it  confers  power  on  an 
assignee  to  delay  the  disposition  of  the  property. 

An  existing  attachment  is  not  made  void  by  proceed- 
ings in  insolvency  unless  there  is  a  specific  law  prohibiting 
such  attachments.  On  this  account  in  the  states1  where 
no  such  laws  exist,  creditors  are  vigilant  in  securing  pre- 
ferred claims  by  getting  attachments  on  the  debtor's 
property.  However,  the  laws  of  many  of  the  states 
make  attachments  void  when  obtained  within  a  prescribed 
time  previous  to  insolvency.  Even  in  such  cases,  vigi- 
lant creditors  secure  preferred  claims,  taking  chances 
that  the  time  of  these  claims  will  not  fall  within  the  pre- 
scribed limit. 

Many  states  make  the  conveyance  of  property  imme- 
diately preceding  insolvency  proceedings  to  keep  it  from 
falling  into  the  hands  of  creditors  fraudulent,  and  such 
property  may  be  reclaimed  by  the  assignee.  In  these 
states  false  claims  paid  out  immediately  preceding 
insolvency  proceedings  may  also  be  recovered  by  the 
assignee. 

When  an  estate  is  closed  all  the  creditors  share  equally 

1  Dunscomb:  Bankruptcy,  p.  163. 


350  MERCANTILE  CREDIT 

in  proportion  to  their  claims  after  the  preferred  debts  are 

paid.     These  in  order  of  priority  of  claim  are  (1)  debts 

due  the  United  States;   (2)  debts  and  taxes 

re  erre       owecj  ^he  state:  (3)  in  some  cases  the  claims 
debts. 

of  a   landlord  for  rent;    (4)  in  many  states, 

wages  for  labor  performed  within  a  limited  period  pre- 
ceding insolvency ;  (5)  preferred  creditors. 

The  conditions  of  discharge  vary  in  different  states. 
As  a  rule  the  debtor  must  surrender  his  property  for  the 

benefit  of  his  creditors,  giving  a  correct  in- 
Conditions  . .       ,  '  *T ,  .  .. 

of  dis-         ventory  of  it,  the  names  of  his  creditors,  their 

charge  in  residences,  and  the  amounts  owed  each.  In 
different  gome  cases  he  is  required  to  state  the  causes 
of  his  indebtedness.  In  some  states  he  may 
file  a  petition  for  his  discharge  when  he  surrenders  his 
property;  in  other  states  he  must  postpone  his  ap- 
plication several  months.  After  his  property  is  divided 
among  his  creditors,  if  he  has  not  been  guilty  of  fraud,  he 
may  be  discharged  by  the  court  from  the  payment  of 
the  residue  of  his  debts.  Fraudulent  conduct,  which 
prevents   a   discharge,    often  means,  as  in  Wisconsin,1 

(1)  swearing   falsely   regarding   his   estate   and   debts, 

(2)  selling  or  transferring  property  after  petitioning  to  be 
adjudged  a  bankrupt,  (3)  secreting  his  estate  or  books, 
and  (4)  preferring  creditors  or  permitting  an  unfair  claim 
to  prevail  against  the  estate. 

In  some  states,  especially  in  New  England,  the  desires 
of  the  creditors  are  considered  in  granting  a  discharge. 

1  Wisconsin  Statutes,  4282-4206. 

2  Revised  Laws,  1902,  Vol.  II,  pp.  1433-1468. 


STATE  INSOLVENCY  LEGISLATION       351 

In  Massachusetts,  if  the  assets  do  not  pay  50  per  cent,  of 
the  debts,  a  debtor  cannot  be  discharged  without  the 
consent  of  a  majority  in  number  and  in  value    Bank_ 
of  the   creditors.     If  the  debtor  becomes  a    ruptcy  in 
bankrupt  a  second  time,  then  the  consent  of    New 
three-fourths  in  number  and  amount  of  the      ng  an 
creditors  is  necessary  to  a  discharge.     The  debtor  is  pre- 
vented from  receiving  a  discharge  if  he  has  failed  to  keep 
proper  books;  however,  in  this  case  if  he  is  not  guilty  of 
fraud,  the  court  may  discharge  him  after  six  months,  if 
his  debts  do  not  exceed  $5,000  and  if  two-thirds  in  num- 
ber and  amount  of  his  creditors  consent  to  his  discharge. 
In  Maine1  a  debtor  may  be  discharged  if  he  is  not 
guilty  of  fraud.     A  second  discharge  requires  the  consent 
of   a  majority    in  number  and  value  of  his 

creditors,  and  a  third  requires  the  consent  of    Discliarge 
ji  /*         i  i  ii  r     i        from  debts 

three-fourths   in  number   and   value   of  the    in  i/iaine 

creditors.     When    a    debtor   is    a    voluntary 

bankrupt  the  consent  in  writing  of  a  majority  in  number 

and  amount  of  his  creditors  is  necessary  to  a  second  and 

a  third  discharge. 

When  a  debtor  applies  for  a  discharge  in  New  York,3 
he  must  send  with  his  application  the  petition  of  his 
creditors  to  whom  he  owes  at  least  two-thirds  of  his 
debts. 

The  insolvency  law  of  Rhode  Island3  makes  a  distinc- 
tion between  traders  and  other  classes.     If  the  insolvent 

1  Revised  Statutes,  1903,  pp.  628-648. 
1  Consolidation  Laws,  VI,  pp.  860-928. 
3  Rhode  Island,  General  Laws,  1909,  pp.  1221-1239. 


352  MERCANTILE  CREDIT 

petitioning  for  a  discharge  is  a  merchant,  manufacturer 
or  trader,  "he  shall  not  be  discharged  if  he  has,  within 
four  months  prior  to  being  adjudged  insol- 
solvency  vent,  failed  to  keep  or  has  destroyed  his  books 
law  in  of  account,  or  papers,  from  which  his  true 

Rhode  condition    may    be    known,   with    intent   to 

I  sl  8.11(1 

hinder,  defraud  or  delay  his  creditors;  if  he 
has  given  a  preference,  or  made  a  false  statement  in 
writing  to  secure  credit,  or  if  he  has  suffered  a  lien  to  be 
secured  on  his  property." 

Texas1  has  a  peculiar  assignment  law.  A  debtor  may 
make  an  assignment  for  the  benefit  of  as  many  creditors 
as  will  accept  the  terms  of  payment  made 
Insolvent  pOSSible  by  the  distribution  of  his  property. 
Texas.  ^ne  insolvent  is  then  discharged  from  the 

payment  of  further  sums  to  these,  providing 
that  the  debtor's  assets  will  pay  one-third  of  the  claims 
of  these.  The  insolvent  is  not  discharged,  however,  from 
the  payment  of  all  claims  in  full  of  those  who  do  not 
accept  the  terms  of  settlement  and  who  consequently 
receive  nothing  from  the  distribution  of  the  assets  of  the 
debtor. 

Insolvent  laws  in  the  earlier  sense,  that  is,  that  action 
the  purpose  of  which  was  to  secure  a  discharge  from 
Imprison-  Prison>  must  be  initiated  by  debtors  are  uni- 
ment  for  form  in  Arkansas,  Illinois,  Kentucky,  Mon- 
insol-  tana,  New  Jersey,  New  York,  North  Carolina, 

VCDCV 

Ohio,    Pennsylvania,    and   Wisconsin.     As  a 
rule  in  these  states,  when  a  debtor  is  arrested  and  placed 
1  Civil  Statutes,  Sayles  21,  pp.  61-73. 


STATE  INSOLVENCY  LEGISLATION       353 

in  jail,  he  applies  to  the  court  for  a  discharge  from  jail, 

appending  to  his  petition  an  inventory  of  his  property, 

giving   its   amount  and  value,  stating  the  names  and 

residence  of  his  creditors,  and  declaring  that  he  is  willing 

to  surrender  his  property  for  the  benefit  of  his  creditors. 

The  court  calls  a  meeting  of  the  creditors  to  enable  them 

to  give  reasons  why  the  debtor  should  not  be  discharged. 

If  it  is  established  that  the  debtor  has  not  committed  a 

punishable  offense  under  the  law,  he  is  discharged  from 

prison.     In  most  cases  the  debtor  is  given  the  privilege 

of  a  trial  by  a  jury  if  he  desires  it.     When  convicted  of 

certain  classes  of  frauds,  in  several  states  debtors  may  be 

sent  to  prison. 

The  most  complete  bankruptcy  laws  are  found  in  New 

England.     All  of  the  New  England  States  have  both 

voluntary  and  involuntary  bankruptcy  laws. 

The  creditors  elect  their  assignee  and  the  de-         .  . 

sires  of  the  creditors  as  a  rule,  are  considered  in     in  New 

discharging  an  insolvent  from  his  debts.     The    England 

law  states  in  great  detail  what  the  insolvent      ery  ,  . 
°  complete. 

is  required  to  do  both  in  voluntary  and  in  in- 
voluntary insolvency.  The  Acts  preventing  a  discharge 
are  very  clearly  set  forth.  Several  months  preceding  the 
Acts  of  insolvency  the  debtor  cannot  grant  preferences, 
and  attachments  made  within  that  period  may  be 
dissolved. 

In  her  insolvency  laws  Georgia  makes  the  same  dis- 
tinction between  traders  and  non-traders  as  was  formerly 
observed  in  England,  and  is  still  observed  on  the  conti- 
nent.    Traders  only  may  be  made  involuntary  bankrupts 


354  MERCANTILE  CREDIT 

whereas  all  other  classes  have  the  privilege  of  voluntary- 
bankrupts.  Any  person  is  defined  as  a  trader1  "who  is 
engaged  in  buying  and  selling  real  estate  or 
Insolvent  personal  property,  or  who  is  a  banker,  broker, 
Georgia  commission  merchant  or  manufacturer  of  arti- 
cles which  exceed  in  value  $5,000  a  year." 
When  a  debtor  fails  to  pay  his  debts  as  they  mature, 
creditors  representing  one-third  of  the  unsecured  debts 
may  petition  the  court  of  equity  to  collect  the  debts. 
The  chancellor  has  the  right  to  grant  injunctions  and  to 
appoint  receivers.  After  the  appointment  of  receivers 
no  creditor  can  acquire  a  preference  or  secure  a  lien  or 
judgment  against  the  property  of  the  debtor.  After 
the  debtor  has  surrendered  all  his  property  for  the  benefit 
of  his  creditors,  the  chancellor  may  recommend  that  the 
creditors  release  him  from  further  liability  to  pay  the 
balance  of  his  debts;  but  the  power  to  do  so  is  wholly  in 
their  hands. 

Corporations,  other  than  municipal,  have  the  privilege 
of  making  an  assignment,  but  in  doing  so  they  are  not 
permitted  to  prefer  creditors.2  Persons  and  firms  in 
making  an  assignment  may  prefer  creditors,  giving 
mortgages,  liens,  etc.  Assignments  must  convey  all 
property  and  lists  of  creditors  with  their  addresses  and 
the  amounts  owed  each  must  be  furnished.  Within 
fifteen  days  the  assignor  and  assignee  must  prepare  lists 
of  property  with  its  valuation,  which  must  be  kept  on 
file   in   the    County   Clerk's    office   for   ten   days.     Al 

1  Code  of  State  of  Georgia,  Vol.  I,  1911. 

2  Code  of  State  of  Georgia,  Vol.  I,  1911. 


STATE  INSOLVENCY  LEGISLATION       355 

creditors  must  be  notified,  and  they  have  the  privilege 
of  inspecting  these  lists. 

Louisiana  has  both  a  voluntary  and  an  involuntary  in- 
solvency law.1     Her  insolvency  law  resembles  the  bank- 
ruptcy system  of  the  continent  and  on  that 

Insolvent     acC0unt  it  has  from  the  American  point  of 

law  in 

Louisiana,    view  some  peculiar  features.     Upon  failure 

to  pay  his  debts  a  judgment  creditor  may 
compel  his  debtor  to  produce  his  property  by  petitioning 
the  court  to  have  the  property  surrendered.  The  court 
then  requires  the  debtor  to  file  a  list  of  his  property,  the 
names  of  his  creditors,  their  residences,  and  the  amounts 
owing  them.  The  judge  then  calls  a  meeting  of  the  credit- 
ors at  which  a  majority  in  number  and  amount  determine 
if  the  debtor's  property  is  to  be  surrendered.  If  the 
property  is  to  be  surrendered  the  creditors  elect  syndics 
who  take  control  of  the  property.  Upon  refusal  to  sur- 
render his  property,  a  debtor  may  be  sent  to  jail. 

A  fraudulent  debtor  is  defined  as  one  who  has  neglected 
to  declare  any  of  his  property,  "who  has  changed  or 
concealed  his  books,"  who  has  given  a  preference  within  a 
year  of  the  acts  of  insolvency  or  who  committed  any 
other  act  to  defraud  his  creditors.  When  the  debtor  is 
convicted  of  fraud  by  a  jury  he  is  to  be  sentenced  to 
imprisonment  for  three  years,  and  is  to  be  deprived  in 
the  future  of  the  privileges  of  the  insolvency  law.  If  the 
debtor  is  guilty  simply  of  granting  an  unjust  preference 
he  may  be  relieved  from  imprisonment  by  restoring  to 

1  Constitution  and  Revised  Laws  of  Louisana,  1904,  Vol.  I, 
pp.  810-825,  Solomon  Wolff.  I 


35G  MERCANTILE  CREDIT 

his  creditors  the  amount  unlawfully  conveyed.  If  the 
preference  was  given  within  three  months  of  his  failure, 
the  preferred  creditor  loses  his  advantage  and  the  debtor 
is  to  be  denied  the  privileges  of  the  insolvency  law. 


CHAPTER  XXI 

LAWS  REGULATING  THE  SALE  OF  GOODS 
IN  BULK 

Previous  to  1900  but  three  states  Louisiana,  Oregon, 
and  Minnesota,  had  laws  regulating  the  sale  of  goods  in 
Origin  of  Du^.  In  January,  1910,1  thirty-nine  states 
movement  and  the  District  of  Columbia  had  laws 
for  bulk  governing  the  sale  of  goods  in  bulk.  The 
rapidity  of  the  movement  in  the  direction  of 
legislation  of  this  class  amounting  to  almost  a  crusade, 
was  primarily  the  result  of  action  taken  by  the  National 
Association  of  Credit  Men  in  1897.  Believing  that 
rigid  legislation  regulating  sales  of  this  class  would 
place  credit  on  a  higher  plane,  this  organization  through 
its  legislative  committee  carried  on  a  persistent  campaign 
in  every  state  in  the  Union. 

A  model  law  was  framed  by  the  National  Association 

and  then  each  state  in  turn  was  asked  to  pass  the  law  or 

one  including  its  most  important  provisions. 

The  uniformity  in  the  bulk  sales  laws  of  the    laws 

different  states  is  the  best  evidence  of  the    passed  as 

singleness  of  purpose  back  of  this  legislative    *esult  of  ■ 

movement.    One  judge  in  writing  the  majority 

J      »  »  .  campaign. 

opinion    declaring    a    law    unconstitutional 

1  The  states  not  having  bulk  sales  laws  at  this  time  were  Illi- 
nois, Iowa,  Missouri,  Arkansas,  Alabama,  Kansas,  South  Dakota 
and  Wyoming. 

357 


358  MERCANTILE  CREDIT 

comments  on  this  fact.1  "Statutes  that  are  passed  pro 
bono  publico  rarely  sweep  the  country  with  such  irresist-  * 
able  momentum,  while  much  fantastic  legislation  has  re- 
sulted from  organized  crusades  upon  legislatures  by  the 
advocates  and  supporters  of  special  classes.  This 
statute  is  evidently  of  that  kind,  which  has  been  so  fre- 
quent of  late,  a  kind  which  is  meant  to  protect  some 
class  in  the  community  against  the  fair,  free  and  full  com- 
petition of  some  other  class,  the  members  of  the  former 
class  thinking  it  impossible  to  hold  their  own  against 
such  competition,  and,  therefore,  flying  to  the  legislature 
to  secure  some  enactment  which  will  operate  favor- 
ably to  them  or  unfavorably  to  their  competitors." 
Whatever  may  be  said  of  the  motives  ascribed 
by  this  judge  to  those  responsible  for  this  and  other 
legislative  campaigns,  the  results  achieved  were 
accomplished  by  careful  planning  and  by  persistent 
efforts. 

In  the  absence  of  legislation  of  this  sort  practices  are 
resorted  to  which  are  injurious  to  trade.  Credit  is 
Regular  granted  because  of  the  necessity  of  paying 
methods  debts  from  the  proceeds  of  goods  purchased. 
of  busi-  it  is  granted  under  the  assumption  that  the 
customary  methods  of  trade  will  be  followed 
by  the  retailer  and  that  the  latter  will  pay  his  debts  when 
his  goods  are  sold.  When  goods  are  sold  in  bulk,  the 
customary  methods  of  the  merchant  are  abandoned.  The 
seller  does  not  need  to  make  provision  to  liquidate  the 

1  Judge  Werner  in  declaring  the  New  York  law  of  1902  uncon- 
stitutional. 


THE  SALE  OF  GOODS  IN  BULK  359 

liabilities,  and  the  creditor  has  no  claim  whatever  against 
the  stock  after  it  is  sold. 

In  selling  goods  on  time  the  jobber  or  manufacturer 
considers  the  credit  standing  of  the  purchaser,  his 
business  ability  in  his  particular  trade,  his  chance  for 
success,  his  honesty,  integrity,  etc.,  which  are  all  a 
matter  of  record.  He  assumes  as  a  matter  of  course 
that  the  business  in  which  the  customer  is  engaged  will 
be  carried  on  in  the  customary  way.  If  the  seller  be- 
lieved that  the  regular  retail  methods  would  be  abandoned 
and  that  the  entire  stock  would  be  sold  at  one  time  to  a 
single  purchaser,  ordinarily  the  goods  would  not  be 
shipped,  and  commercial  credit  would  not  be  granted. 
It  is  for  these  reasons  that  bulk  sales  laws  make  different 
requirements  of  those  who  sell  goods  in  bulk  from  those 
who  follow  the  same  methods  of  trade  that  are  assumed 
when  credit  is  granted,  and  the  advocates  of  stringent 
legislation  insist  that  no  harm  or  inconveniences  will 
come  to  honest  merchants  by  these  distinctions. 

The  chief  abuse  arising  from  the  sale  of  goods  in 
bulk  takes  as  a  rule  this  form.     A  merchant  who  has  pur- 
chased a  stock  of  goods  chiefly  on  credit,  sells 
his  entire  stock  to  a  single  purchaser.     He    abuse 
realizes  at  once  on  the  sale  and  his  creditors    which  the 
are  helpless  in  the  absence  of  legislation  to    bulk  sales 

cover  this  specific  case.     The  purchaser  may    "         . 
^  1  J     corrects. 

be  aware  often  of  the  motives  of  the  seller,  but 
if  the  purchase  is  made  at  an  unreasonably  low  figure 
he  has  no  financial  interest  in  exposing  the  purposes  of 
the  seller. 


360  MERCANTILE  CREDIT 

Another  irregularity  aimed  at  by  the  bulk  sales  law 
is  the  transformation  of  a  business  from  the  single  entre- 
preneur or  partnership  organization  into  the  corporation. 
The  purchasing  corporation  practically  buys  up  the  entire 
stock,  good  will,  etc.,  and  perhaps  the  buildings  and  equip- 
ment, although  the  original  owner  may  become  a  stock- 
holder in  the  corporation  to  the  extent  of  his  original 
possessions  in  the  business,  and  without  a  law  governing 
such  sales,  the  creditors  of  the  seller  have  no  more  title 
to  his  property  than  if  it  had  been  disposed  of  outright. 

To  correct  these  abuses  the  National  Association  of 
Credit  Men  has  proposed  a  specific  law,  the  chief  provi- 

The  pro-      s*ons   °*   wni°n   nave   ^een   incorporated   in 

visions  of    nearly  all  the  laws  of  the  states  which  have 

the  model    restricted    sales    in    bulk.     The    important 

provisions    of    this    law    are    the    following: 

(1)  Five  days  before  the  sale,  the  seller  and  purchaser 
must  make  a  detailed  inventory  showing  the  quantity  and 
as  far  as  possible  the  cost  price  of  each  article  to  be  sold; 

(2)  five  days  before  the  sale  the  purchaser  must  make  an 
inquiry  as  to  names,  places  of  residence  or  of  business 
of  all  creditors  of  the  seller  and  the  amount  owing  each 
creditor.  A  written  answer  to  these  inquiries  must  be 
secured  from  the  seller  and  retained  six  months  after  the 
time  of  sale;  (3)  the  purchaser,  five  days  before  the  sale, 
must  notify  all  creditors  of  the  proposed  sale,  the  cost 
price  of  the  goods  to  be  sold  and  the  price  to  be  paid  for 
them;  (4)  five  days  before  the  sale  the  seller  must  answer 
all  questions  in  writing  truthfully,  and  a  failure  to  do  so 
or  a  failure  to  make  complete  and  true  answers  will  be 


THE  SALE  OF  GOODS  IN  BULK  361 

treated  as  a  misdemeanor  and  be  dealt  with  accordingly. 
A  failure  to  carry  out  the  above  provisions  makes  the 
sale  fraudulent  and  void  as  against  the  creditors. 

Bulk  sales  are  made  frequently  as  low  as  40  or  50 
per  cent,  of  the  real  value  of  goods,  and  in  such  cases  the 
sale  is  usually  made  with  intent  to  defraud, 
and  the  purchaser  is  in  collusion  with  the    0^Ven  ^ry 
seller.     In   compelling    an   inventory   to    be    to  be  sold 
made  giving  the  cost  price  of  the  goods  to  be    and  noti~ 
sold  and  the  proposed  selling  price,  the  real      CV-?n  ° 
purpose    and    nature    of   the   transaction   is 
made  obvious.     The  purchaser  is  required  to  give  these 
facts  to  the  creditors  of  the  seller  several  days  before  the 
sale  takes  place,  and  if  the  latter  is  attempting  to  sacrifice 
the  goods  with  fraudulent  intent,  his  efforts  may  be 
thwarted  by  those  concerned.     The  time  limit  required 
of  purchasers  to  notify  creditors  prior  to  the  sale  varies  in 
the  different  state  laws,  but  in  no  instance  is  it  less  than 
five  or  more  than  ten  days. 

Most  of  the  laws  contain  a  clause  stating  that  the 
Act  shall  not  apply  to  sales  by  executors,  administrators, 
receivers,  assignees  or  trustees  in  bankruptcy  for  the 
benefit  of  creditors  or  to  public  officers  conducting  sales 
in  their  official  capacity. 

The  form  of  the  laws  vary  with  the  time  of  their  en- 
actment. Louisiana  has  the  most  drastic  law  on  sellers 
and  purchasers  of  goods  in  bulk,  but  this  law  Louisiana 
was  passed  (1896)  before  the  crusade  against  bulk  sales 
bulk  sales  was  begun  by  the  National  Associa-  law' 
tion    of    Credit    Men.     This   law   makes   it    a   misde- 


3G2  MERCANTILE  CREDIT 

meanor  to  purchase  goods  under  a  fictitious  name 
with  intent  to  cheat  or  to  defraud,  and  a  penalty  of  a 
fine  or  an  imprisonment  from  six  to  twelve  months  is 
provided.  Buying  on  credit  and  selling  out  in  the  usual 
course  of  trade  with  intent  to  cheat  the  seller  is  also 
treated  as  a  misdemeanor  for  which  the  above  penalty  is 
provided.  One  who  purchases  goods  in  bulk  which  were 
not  paid  for  by  the  seller,  without  securing  a  written 
sworn  statement  from  the  seller  that  the  goods  had  been 
paid  for,  is  considered  guilty  of  a  misdemeanor  for  which 
the  usual  penalty  for  that  offense  in  Louisiana,  is  imposed. 
Fraudulent  intent  is  established  in  this  Act  by  the  failure 
of  the  vender  of  goods  in  bulk  to  pay  the  sellers  for  their 
goods;  and  by  the  failure  of  the  purchaser  to  secure  from 
the  seller  a  signed  or  sworn  statement. 

The  Oregon  law  which  was  passed  in  1899  required 
the  purchaser  of  goods  in  bulk  to  obtain  a  written  state- 
ment from  the  seller  containing  names  and 

addresses  of  creditors  and  the  amounts  owed 
Oregon 
law.  each,  and  these  facts  were  to  be  communicated 

to  the  creditors  personally  or  by  registered 

letter  several  days  before  the  consummation  of  the  sale. 

Failure  to  comply  with  the  provisions  of  the  Act  makes 

the  sale  fraudulent,  and  a  right  of  action  is  given  to 

creditors  of  the  seller  against  the  purchaser  of  goods  in 

bulk.     The  making  of  a  false  statement  by  the  seller  is 

considered  perjury  or  a  misdemeanor,  and  the  offender 

is  subjected  to  the  penalties  imposed  by  the  laws  of  the 

state  for  such  offenses.     The  Minnesota  law,  passed  also 

in  1899,  contains  all  these  provisions  except  the  last  one. 


THE  SALE  OF  GOODS  IN  BULK  363 

With  unimportant  exceptions  all  the  laws  contain  these 
provisions,  the  important  difference  being  with  reference 
to  the  making  of  a  false  statement  by  the  seller  a 
criminal  offense.  Of  the  states  which  were  first  to  pass 
bulk  sales  laws,  seventeen  made  the  giving  of  a  false 
statement  by  the  seller,  with  reference  to  his  goods 
which  were  sold  in  bulk,  either  a  misdemeanor  or 
perjury.  The  laws  of  seventeen  other  states  do  not 
make  the  giving  of  a  false  statement  a  criminal  offense, 
but  simply  make  the  sale  of  goods  in  bulk  void  and 
fraudulent.  The  first  law  passed  by  Ohio  in  1902, 
which  was  declared  unconstitutional,  made  the  giving 
of  a  false  statement  by  the  seller  a  misdemeanor,  but 
the  second  law  passed  by  Ohio  in  1908,  also  declared 
unconstitutional,  contained  no  provisions  whatever  with 
reference  to  a  false  statement. 

In  most  of  the  laws  governing  bulk  sales  the  seller  is 
required  to  furnish  to  his  purchaser  an  inventory  of 
the  stock  to  be  sold,  giving  the  cost  price  of  each  item 
so  far  as  he  can,  and  in  some  instances  the  what  most 
selling  price  of  the  entire  stock.  He  is  also  bulk  sales 
required  to  furnish  him  a  list  of  his  creditors,  laws 
their  residence,  and  the  amounts  owed  each.       "      m 

As  a  rule,  this  data,  together  with  a  notice  of  the 
time  of  sale,  is  to  be  furnished  by  the  seller  to  the 
creditors  from  five  to  ten  days  preceding  the  time  of 
sale.  In  the  states  where  it  is  required  that  this  inven- 
tory is  t  o  be  preserved,  it  must  be  retained  six  months. 
In  but  few  instances  do  the  laws  require  a  public  record 
of  the  inventory.     The  California  law  of  1903  requires 


364  MERCANTILE  CREDIT 

the  seller  of  goods  in  bulk  to  file  in  the  office  of  the 
county  recorder,  at  least  five  days  before  the  sale,  a 
notice  of  the  sale,  the  name  of  the  purchaser,  and  a 
statement  of  the  character  of  the  property  to  be  sold 
and  the  purchase  price.  Under  this  law  the  purchaser  is 
freed  from  any  responsibility  in  making  the  transaction. 
The  Connecticut  law  of  1903  requires  the  seller  to  re- 
cord in  the  office  of  the  town  clerk,  in  the  town  where  the 
recorder  conducts  his  business,  a  notice  of  his 

The  Con-    mtention  to  sell  the  property  in  bulk,  a  de- 

necticut  . 

law>  scription  of  it,  and  the  name  01  the  purchaser. 

The  purchaser  is  free  from   any   obligation 

with  reference  to  the  creditors  of  the  seller  except  that  the 

sale  is  void  if  the  above  requirement  is  not  carried  out. 

The  South  Carolina  law  (1906)  requires  the  seller  of 

goods   in  bulk,  who   intends  to   retire  from  the  retail 

business,  to  make  a  complete  inventory  of  all 
The  South  ^q  property  he  proposes  to  sell  with  a  state- 
Carolina  ,  ,  J.  ,  i  i  •  f  i- 
jaw>              ment  of  the  ruling  wholesale  price  ol  each 

item.  The  inventory  must  also  include  a 
complete  list  of  his  creditors  with  the  amounts  owed 
each  and  his  statement  under  oath  that  the  facts  re- 
ported are  true.  The  inventory  must  be  furnished  the 
purchaser,  and  copies  must  be  retained  in  his  own 
possession  six  months.  Ten  days  before  the  termina- 
tion of  the  sale,  the  seller  and  purchaser  must  give  notice 
to  all  creditors  of  the  seller  of  the  intended  sale  and 
purchase.  The  inventory  of  the  property  must  be  re- 
tained by  both  seller  and  purchaser  six  months,  and  be 
subject  to  inspection  by  any  of  the  creditors.     A  failure 


THE  SALE  OF  GOODS  IN  BULK  365 

to  carry  out  any  of  these  requirements  makes  the  sale 
fraudulent,  and  gives  the  creditors  of  the  seller  a  title  to 
property  in  the  hands  of  the  purchaser,  and  the  latter 
is  made  liable  for  the  value  of  any  property  he  sells. 

Three  Acts  passed  in  1907  introduced  new  features 
governing  the  responsibility  of  purchasers  and  sellers. 
The  Nebraska  law  requires  the   customary    New 
inventory  to  be  made  by  seller  and  purchaser,    features 
and  the  notice  by  the  purchaser  to  the  credi-    in  bulk 
tors  of  the  seller  of  the  intended  purchase  of 
the  property.     The  inventory  and  the  notice  may  be 
omitted  if  the  seller  files  with  the  county  clerk  where  the 
stock  is  situated  an  agreement  with  his  creditors  waiv- 
ing the  requirement  of  the  inventory  and  notice. 

The  North  Carolina  law  makes  a  bulk  sale  void  unless 
the  seller  makes  an  inventory  of  the  property  with  the 
cost  price  of  each  item  which  he  proposes  to  sell  and 
notifies  all  his  creditors  of  the  proposed  sale.  How- 
ever, the  inventory  and  the  notice  may  be  waived  if 
the  seller  executes  a  bond  to  a  trustee  covering  the 
value  of  the  goods  conditioned  upon  the  use  of  the  pro- 
ceeds of  the  sale  to  pay  creditors  the  amounts  due  them 
after  making  adequate  allowance  for  the  value  of  the 
personal  property  allowed  by  law. 

The  Nevada  law  makes  the  usual  requirement  of  in- 
ventory, notice  to  creditors  of  the  seller,  and  considers 
a  false  statement  by  the  seller  perjury,  for  which  offense 
a  heavy  penalty  is  given.  All  the  provisions  of  this  Act, 
however,  may  be  waived  if  the  seller  secures  the  consent 
of  a  majority  in  number  and  amounts  of  his  creditors. 


366  MERCANTILE  CREDIT 

In  four  states,  New  York,  Utah,  Ohio  and  Illinois, 
laws  have  been  declared  unconstitutional,  but  in  the 

Laws  de-  nrs^  *wo  °^  ^nese  new  ^aws  naye  been  passed, 
claredtm-  The  New  York  Act  of  April  11,  1902,  was 
constitu-  declared  unconstitutional  but  a  new  Act  ap- 
tional*  proved  May  3,  1904,  is  in  force.     In  Utah 

the  law  of  March  14,  1901,  was  declared  unconstitutional, 
but  the  law  of  March  9,  1905,  is  still  in  force.  The 
Ohio  Act  of  April  4,  1902,  was  declared  unconstitu- 
tional by  the  Supreme  Court  of  the  state  June  7,  1904, 
and  a  new  law  passed  April  30,  1908,  has  also  been  de- 
clared unconstitutional.  The  Illinois  law  passed  May 
13,  1905,  was  declared  unconstitutional  June  18,  1908. 

In  all  other  states  the  bulk  sales  laws  are  in  force.  In 
seven  of  these,  Washington,  Tennessee,  Massachusetts, 
Connecticut,  Michigan,  Kentucky,  and  Oklahoma,  the 
laws  were  declared  constitutional  by  the  Supreme  Courts 
of  the  states  after  the  issues  were  squarely  drawn  on 
constitutionality  by  lower  courts. 

The  objections  to  the  laws  on  constitutional  grounds 
were  based  chiefly  upon  the  infringement  of  the  common 
law,  being  in  restraint  of  trade,  of  restricting  the  right 
of  contract,  of  imposing  hardships  on  certain  classes  of 
people,  and  of  infringing  on  the  property  rights  of 
classes  of  producers. 

The  first  Ohio  law  which  was  declared  unconstitutional 
was  more  drastic  than  most  laws  of  this  class.     In  con- 
trasting the  Ohio  law  with  others  to  which 

„, .    ,  the  attention  of  the  court  had  been  directed 

Ohio  law. 

that  had  been  declared  to  be  constitutional, 


THE  SALE  OF  GOODS  IN  BULK  367 

the  comment  was  made  that  they  "present  substantial 
differences  from  those  which  are  involved  in  the  present 
inquiry."  The  sale  of  an  entire  stock  of  merchandise 
outside  of  the  regular  course  of  trade  is  considered 
fraudulent  against  the  creditors  of  the  seller  unless 
the  following  regulations  are  carried  out:  (1)  The  seller 
must  deliver  to  the  purchaser  (a)  a  complete  list  of  all 
his  creditors  with  their  addresses,  (b)  the  amounts  owed 
each,  and  (c)  the  books  or  original  invoices  "from  which 
the  cost  price  of  the  merchandise  can  be  ascertained"; 
(2)  the  seller  and  purchaser  are  required  six  days  before 
the  sale  to  make  an  inventory  showing  the  cost  price  to 
the  seller  of  each  item  included  in  the  sale;  (3)  the  list 
of  creditors,  books,  invoices  and  inventory  must  be 
retained  by  the  seller  six  months  after  the  sale,  subject  to 
the  inspection  of  the  creditors  of  the  seller;  (4)  the  pur- 
chaser is  required  to  notify  in  person  or  by  registered 
letter  all  the  creditors  of  the  seller  at  least  five  days 
prior  to  the  sale  of  the  goods  to  be  sold,  their  cost  price 
and  their  selling  price. 

If  the  seller  fails  to  comply  with  the  requirements  of 
the  law  or  if  his  report  to  the  purchaser  is  incorrect,  and 
in  consequence  of  this  any  creditor  is  wronged  or  de- 
frauded, the  seller's  offense  is  considered  a  misdemeanor 
which  is  subject  to  a  fine  or  imprisonment  or  both. 

The  decision  of  the  Supreme  Court  was  given  in  the 
case  of  Miller  vs.  Crawford,  June  7,  1904.1  The  court 
stated  as  a  fundamental  proposition  from  the  Bill  of 
Rights  that  "the  terms  of  the  instrument  compel  the 

1  70  Oh.  St.  207. 


368  MERCANTILE  CREDIT 

conclusion  often  stated  that  the  holding  of  private  prop- 
erty, its  acquisition  and  its  use  are  subservient  only  to  the 
welfare  of  the  public."     The  following  propo- 

,  sitions  determined  the  decision  of  the  court: 

of 

Supreme      1.   "For  every  restriction  upon  the  enjoyment 
Court  on      anc[  use  0f  property  there  must  be  substantial 

, rs       10     reasons    of    a   public   character:   2.  if  a  re- 
law.  x  ' 

striction  is  placed  upon  the  alienation  of 
property,  it  must  be  for  the  entire  body  of  the  people  or, 
at  least,  of  all  who  are  within  the  reason  of  its  restric- 
tion; 3.  a  distinction  sometimes  thought  important 
between  property  in  lands  and  in  chattels  upon  the 
ground  that  the  former  is  derived  from  the  state,  will 
at  least  justify  the  conclusion  that  legislative  control 
over  chattels  is  not  greater  than  over  lands;  4.  the 
express  limitations  which  the  constitution  imposes  upon 
the  legislature  apply  to  the  exercise  of  powers  which  are 
truly  legislative  in  character,  and  since  none  but  legis- 
lative power  is  committed  to  it,  the  exercise  of  that 
power  is  also  confined  within  all  the  limitations  which  are 
suggested  by  its  nature." 

The  court  then  goes  on  to  analyze  the  Act  to  show  that 
its  provisions  are  in  conflict  with  these  principles.  It 
is  asserted  that  a  sale  of  goods  in  bulk  is  absolutely  void 
unless  all  of  the  various  provisions  of  the  Act  are  com- 
plied with.  The  requirements  of  the  seller  cannot  be 
carried  out  when  he  does  not  know  who  all  his  creditors 
are  and  the  amounts  he  owes  each.  The  Act  took  effect 
as  soon  as  it  was  passed,  and  it  applied  to  stocks  of 
merchandise  however  long  they  were  in  the  possession 


THE  SALE  OF  GOODS  IN  BULK  3G9 

of  the  merchant.  The  requirement  that  the  seller 
should  transfer  to  the  purchaser  books  or  original 
invoices  to  show  the  cost  price  of  goods  was  declared 
impossible  of  accomplishment  when  the  seller  did  not 
have  adequate  data.  The  decision  states,  moreover,  that 
the  purchaser  cannot  in  the  nature  of  things  have  the 
knowledge  necessary  for  a  compliance  with  the  law. 

The  court  goes  on  to  say  "  Applying  the  familiar  and 
unquestioned  rule  that  the  validity  of  an  Act  is  to  be 
determined  by  its  practical  operation  and  not  by  its  title 
or  declared  purpose;  this  Act,  under  the  guise  of  prevent- 
ing fraud  in  such  sales,  prohibits  them  altogether,  and 
thus  places  on  the  enjoyment  of  property  an  important 
restriction  which  no  public  interest  requires  and  which 
the  constitution  therefore  forbids.  One  who  challenges 
the  soundness  of  this  conclusion  should  be  prepared  to 
maintain  the  validity  of  an  Act  expressly  forbidding  sales 
of  stocks  of  merchandise  in  bulk.  By  the  Act  the  Legis- 
lature has  attempted  to  discriminate  unwarrantably 
among  debtors  and  creditors.  It  does,  in  liens,  apply  to 
sales  in  bulk  by  wholesale  as  well  as  by  retail  dealers  in 
merchandise.  But  conceding,  for  present  purposes,  that 
when  reasons  for  legislative  discrimination  exist,  then 
sufficiency  is  to  be  determined  finally  by  the  legislature; 
no  reason  is  suggested  by  council,  nor  does  any  occur  to 
us,  for  a  legal  discrimination  in  the  relation  of  debtor 
and  creditor  between  those  who  come  into  that  relation 
with  respect  to  the  purchase  and  sale  of  merchandise  and 
those  between  whom  it  exists  with  respect  to  chattels  in 
general.     Although  the  Act  applies  to  all  the  creditors 


370  MERCANTILE  CREDIT 

of  the  seller,  it  applies  to  those  only  who  are  creditors 
of  the  owner  of  a  stock  of  merchandise,  and  thus  an  un- 
reasonable burden  is  imposed  upon  a  limited  class  of 
debtors  for  the  supposed  benefit  of  a  limited  class  who 
are  creditors." 

With  reference  to  decisions  affirming  the  constitution- 
ality of  corresponding  laws  in  other  states,  the  court 
asserts  that  if  the  reasoning  in  those  cases  were  accepted 
as  sound,  "the  cases  would  be  plainly  distinguishable  by 
essential  differences  in  the  provisions  of  the  statutes,  and, 
in  one  instance  at  least,  by  a  difference  in  the  constitu- 
tional provisions  involved." 

A  law  passed  April  30,  1908,  was  drawn  in  such  a 

manner  as  to  free  it  from  the  provisions  which  made 

the  previous  law  unconstitutional.     This  law 

Til  A 

has     also    been     declared    unconstitutional, 
second 
Ohio  law.     While  the  former  law  contained  more  rigid 

provisions  than  most  of  the  laws  of  other 
states,  the  provisions  of  this  law  are  mild  as  compared 
with  those  of  some  states  regarding  fraudulent  convey- 
ances. A  sale  of  goods  in  bulk  made  with  fraudulent 
intent  is  void  against  the  creditors  of  a  seller,  and  when 
creditors  bring  suit  a  receiver  may  be  appointed  to  take 
possession  of  the  assets  of  the  debtor.  Unless  the  seller 
at  least  seven  days  previous  to  the  transfer,  records  in 
the  office  of  the  county  recorder  where  the  business  is 
conducted  a  notice  of  his  intention  to  sell  the  goods  with 
their  description  and  the  conditions  of  the  transfer,  it  will 
be  presumed  that  the  goods  were  sold  with  fraudulent 
intent.     The  above  requirement  may  be  dispensed  with 


THE  SALE  OF  GOODS  IN  BULK  371 

when  the  sale  is  made  "by  order  of  a  court  or  by  an  ex- 
ecutor, administrator,  guardian,  or  assignee." 

The  case  at  issue  was  one  in  which  a  merchant  sold 
his  goods  without  having  not  less  than  seven  days  pre- 
vious to  the  sale  published  with  the  recorder    The 

of  the  county  as  the  law  required,  his  in-    SuPreme 

Court's 
tention  to  sell  his  goods  in  bulk.     The  cred-    decision 

itors  of  the  seller  brought  suit  against  the  pur-  on  second 
chaser  of  the  goods  claiming  that  they  were  law- 
sold  with  fraudulent  intent.1  Both  the  Common  Pleas 
and  the  Circuit  Courts  decided  in  favor  of  the  de- 
fendant, and  upon  appeal,  the  Supreme  Court  upheld 
the  decision  of  the  lower  court  in  1911.  In  its  deci- 
sion the  Supreme  Court  followed  the  same  line  of  ar- 
gument it  pursued  in  holding  the  former  bulk  sales  law 
unconstitutional.  The  Court  held  that  this  law  imposed 
upon  a  certain  class  of  people  in  selling  goods  obligations 
and  burdens  not  imposed  on  others,  as  fraudulent  intent 
is  presumed  if  those  who  sell  goods  in  bulk  do  not 
file  with  the  county  recorder  at  least  seven  days  prior  to 
their  sale  their  intention  to  do  so,  and  they  are  required  to 
prove  that  the  sale  was  not  made  with  fraudulent  intent 
when  they  do  not  comply  with  the  above  named  require- 
ment of  the  law.  All  other  venders  of  goods  or  those  who 
sell  in  any  other  way  than  in  bulk  are  not  required  to  give 
public  notice  of  their  intention  to  sell,  and  in  no  other  case 
is  fraudulent  conduct  assumed  before  the  person  is  proven 
guilty.  Commenting  on  this  the  Court  says  "Counsel 
have  not  communicated  to  us  any  view  upon  which  we 
1  Ohio  State  Reports,  V.  84,  pp.  328-345. 


372  MERCANTILE  CREDIT 

could  sustain  the  proposition  that  laws  can  be  equal 
which  accord  to  one,  without  proof,  rights  upon  which 
they  accord  to  others  only  upon  proof."  The  decision 
is  then  concluded  with  the  following  significant  statement: 
"  It  seems  to  us  that  this  act  very  plainly  from  its  nature, 
takes  its  place  among  the  enactments  which  constitute 
the  promoted  legislation  of  the  state  not  suggested  by 
comprehensive  views  of  the  rights  and  interests  of  all  the 
people,  but  furthered  by  those  who  desire  to  obtain  ad- 
vantages not  accorded  by  the  general  law." 

The  Bulk  Sales  law  of  Tennessee  which  contains  the 
same  provisions  as  the  corresponding  laws  of  a  majority 

of  the  states  was  declared  constitutional  by 
Supreme  J 

Court  the  Supreme   Court.     The  Act  required  an 

decision       inventory  of  goods  to  be  sold,  a  correct  report 

"*  from  seller  to  purchaser  of  the  cost  price  of  the 

Tennessee. 

goods,  the  names  and  addresses  of  the  cred- 
itors of  the  former,  while  the  purchaser  was  to  notify  the 
seller's  creditors  of  the  intended  purchase  several  days 
in  advance.  In  the  case1  which  came  up,  the  issue  on 
constitutionality  was  definitely  drawn. 

An  attempt  was  made  to  set  aside  the  Act  as  class 
legislation  because  it  applied  to  those  dealing  in  mer- 
chandise and  not  to  such  other  persons  as  farmers,  manu- 
facturers, etc.  In  reply  to  this  the  court  held  that  "the 
statute  is  a  mere  regulation  of  the  mercantile  business, 
designed  to  secure  to  creditors  of  merchants  a  just  par- 
ticipation in  the  distribution  of  the  assets  of  such  mer- 
chants,   and    to    prevent    fraudulent    preferences    and 

1  Jno.  F.  Neas  vs.  Borchus  &  Co. 


THE  SALE  OF  GOODS  IN  BULK  373 

practices  by  them,  and  is  a  valid  exercise  of  the  police 

power  of  the  state."     The  court  held  that  the  act  was 

valid  for  the  following  reasons:  1.  "It  was  intended  to 

prevent  the  practice  of  fraudulently  selling  out  goods  to 

the  injury  of  creditors  by  merchants;  2.  it  was  merely  a 

regulation  of  the  business  of  merchandising;  3.  it  is  not 

class  legislation,  and  that  the  limitation  of  the  Act  to 

merchants  is  not  an  arbitrary  classification,  that  it  does 

not  take  away  the  property  of  the  citizen,  but  only 

regulates  the  sale  of  merchandise  in  such  manner  as  to 

prevent  frauds." 

The  Michigan  law  which  contains  the  usual  provisions  l 

of  bulk  sales  laws  was  declared  constitutional   by  the 

Supreme  Court  Sept.  20,  1906.     It  was  con-    g 

tended  that  the  Act  was  class  legislative  for    court 

two    reasons:  "First,    because    it    limits    its    decision 

operation  to  merchants,  and  does  not  include    !?,.  , . 

c  i      i         •       Michigan, 

farmers,  manufacturers,  etc.;  second,  that  it 

does  not  relate  to  merchants  who  owe  no  debts."  The 
court  held  that  "a  sufficient  reason  for  not  including  in 
its  provisions  merchants  who  owe  no  debts  is  found  in 
the  apparent  purpose  of  the  Act,  which  is  to  protect 
creditors.  If  there  be  no  creditors,  there  is  no  one 
requiring  protection."  With  reference  to  the  other  con- 
tention, the  court  held  that  "it  is  easy  to  discover  reasons 
for  apprehending  and  guarding  against  fraudulent  dis- 
position of  stocks  of  merchandise  by  debtor  owners  which 
would  not  relate  to  other  species  of  property."  After 
quoting  from  another  decision,  the  court  asserted  that 
1  See  case  of  Howard  W.  Spun,  et  al.  vs.  Dayton  A.  Travis,  et  al. 


374  MERCANTILE  CREDIT 

this  is  not  class  legislation.  "It  is  well  known  that  the 
business  of  retailing  goods,  wares,  and  merchandise  is 
conducted  largely  upon  credit  and  furnishes  an  oppor- 
tunity for  the  commission  of  frauds  upon  creditors  not 
usual  in  other  classes  of  business." 

The  Supreme  Court  of  Washington  sustained  the 
constitutionality  of  the  Bulk  Law1  of  that  state  even 

0  though    the   law   was   more    drastic   in   one 

Supreme  ° 

Court  particular  than  bulk  laws  of  most  other  states, 

decision  in  Aside  from  the  usual  provisions  of  such  laws, 
Washing-  the  Washington  law  definitely  stipulates  that 
the  making  of  a  false  statement  knowingly  or 
wilfully  "by  the  seller  to  the  purchaser  with  reference 
to  his  creditors,  the  amounts  owed  them,  etc.,  is  con- 
sidered perjury,  and  upon  conviction  the  seller  may  be 
either  imprisoned  or  fined." 

The  Act  was  objected  to  on  constitutional  grounds  for 
the  following  reasons:  (1)  It  deprives  persons  of  their 
property  without  due  process  of  law;  (2)  it  is  in  restraint 
of  trade.  It  was  contended  that  the  constitution  was 
violated  on  the  first  ground  because  the  Act  restricted 
the  right  of  an  owner  to  dispose  of  his  property.  The 
court  replied  that  "the  Act  does  prohibit  owners  of 
certain  kinds  of  property  from  disposing  of  it  in  a  par- 
ticular way,  without  complying  with  certain  conditions, 
but  it  is  not  for  that  reason  necessarily  unconstitutional. 
Statutes  familiar  to  every  person,  such  as  those  regulating 
the  mortgaging  and  sale  of  personal  property,  requiring 
certain  articles  of  food  made  in  imitation  of  other  well- 

1  John  H.  McDaniels  vs.  J.  J.  Connelly  Shoe  Co. 


THE  SALE  OF  GOODS  IN  BULK  375 

known  articles  to  be  branded  with  their  true  names, 
regulating  the  sales  of  poisons,  and  the  like,  are  statutes 
restricting  the  rights  of  an  owner  in  relation  to  his  prop- 
erty, yet  such  statutes,  in  so  far  as  they  tend  reasonably 
to  prevent  injury  to  the  public,  and  frauds  among  indi- 
viduals, are  uniformly  held  constitutional." 

With  reference  to  class  legislation  the  court  contends 
that  "it  is  well  known  that  the  business  of  retailing  goods, 
wares  and  merchandise  is  conducted  largely  upon  credit, 
and  furnishes  an  opportunity  for  the  commission  of 
frauds  upon  creditors  not  usual  in  other  classes  of  busi- 
ness. In  fact,  charges  of  fraud  made  against  retail 
dealers  who  have  sold  their  stocks  in  bulk  are  among  the 
most  common  with  which  the  courts  are  called  upon  to 
deal.  Legislation  therefore  which  restricts  the  absolute 
right  of  persons  engaged  in  such  business  to  transfer 
their  property,  so  long  as  it  applies  to  all  persons  engaged 
therein,  is  not  class  legislation  within  the  meaning  of  the 
constitution,  merely  because  it  does  not  apply  to  all 
owners  of  property." 

The  court  also  concludes  that  the  Act  is  not  in  restraint 
of  trade;  that  it  does  not  prevent  the  sale  of  goods  in 
bulk;  and  although  it  will  restrict  the  sale  of  goods  in 
this  manner  it  is  only  one  of  the  cases  "where  private 
desire  must  yield  to  the  public  good." 

The  contention  that  bulk  sales  laws  interfere  with  the 
freedom  of  contract  and  are  in  restraint  of  trade  is  best 
answered  by  Justice  Vann  of  the  Court  of  Appeals  of 
New  York  in  giving  the  dissenting  opinion  of  the  court 
which  stated  the  bulk  sales  law  of  that  state  unconstitu- 


376  MERCANTILE  CREDIT 

tional.  With  reference  to  this  the  former  law,  the  decision 
says,  "When  a  merchant  owes  more  than  he  can  pay  he 
has  no  substantial  equity  in  his  stock  of 
Appeals  goods,  and  the  claims  of  his  creditors  are  supe- 
decision  rior  to  his  own.  He  may  be  imprisoned  on 
in  New  civ}j  process  and  punished  criminally  for  mak- 
ing a  fraudulent  disposition  of  his  property, 
and  any  person  who  is  a  party  or  privy  to  the  fraud  may 
be  punished  in  the  same  way.  Interference  with  his 
liberty  and  property  by  such  methods  has  never  been 
successfully  questioned  as  a  violation  of  fundamental 
rights.  Many  restraints  upon  the  freedom  of  contract, 
some  of  which  reach  back  to  colonial  history,  have  passed 
without  challenge,  or,  if  challenged,  have  uniformly  been 
sustained  as  valid.  The  Statute  of  Frauds,  the  act  to 
prevent  fraudulent  conveyances,  insolvent  laws,  the 
Recording  Act,  the  prohibition  of  usury,  lien  laws,  regula- 
tions in  relation  to  chattel  mortgages,  conditional  sales, 
and  preferences  by  corporations  in  general  assignments, 
show  in  how  many  ways  and  in  what  varied  forms  the 
legislature  may  properly  restrain  freedom  of  action  in 
commercial  transactions  in  order  to  promote  the  general 
welfare."  The  decision  goes  on  to  say  further  that "  Such 
interference  with  liberty  and  such  limitation  upon  the  use 
of  property,  although  arbitrary  and  inconvenient,  have 
always  been  regarded  as  valid  in  order  to  prevent  fraud 
and  to  promote  justice.  While  commerce  is  hampered 
to  a  limited  extent  in  some  ways,  it  is  protected  and  pro- 
moted to  a  much  greater  extent  in  other  ways." 

With   reference   to  the   "freedom   of   contract"   the 


THE  SALE  OF  GOODS  IN  BULK  377 

decision  goes  on  to  say:  "Is  freedom  of  contract  inter- 
fered with  more  by  requiring  notice  of  creditors  before 
certain  sales  are  made  than  by  forbidding  certain  other 
sales  altogether?  The  statute  is  intended  to  interfere 
only  with  those  who  buy  and  sell  in  bad  faith  toward  the 
creditors  of  the  vendor.  It  doubtless  interferes  with 
some  who  act  in  good  faith,  but  so  do  the  other  statutes 
referred  to.  In  order  to  prevent  injustice  and  fraud,  leg- 
islation for  time  out  of  mind  has  placed  some  restraint 
upon  commercial  transactions,  and  where  the  legislature 
has  jurisdiction  to  act  the  method  of  suppressing  the  evil 
is  wholly  within  its  sound  discretion." 


INDEX 


Accomodation  paper,  45 
Adjustment  Bureaus,  184-199 
Amendments  of  1870,  308,  309; 

1874,    309,    310,  312; 

1903,  332;  1910,  334 
Assets,  116,  117 
Assignees,  285,  300,  301 
Attorney    as    source    of    credit 

information,  122,  165- 

167; 
as  Collectors,  208 

Babylon,  8 

Bank  note,  21 

Bank  references,  167 

Banker,  13 

Banking  credit,  38,  39,  40,  42, 

43,  44,  45,  55,  77,  78, 

103 
Banking  functions,  39,  40 
Banking  institutions,  12,  13 
Bankrupt,  256,  263,  264,  266, 

267,  302,  322,  323 
Bankrupt  Law   of   1800,   257- 

272 
Bankrupt   law,  purposes  of  a, 

275 
Bankruptcy,  331 

in  New  England,  351 
Bankruptcy  Act  of  1841,  273- 

292;     1867,    293-315; 

1898,  316-344 

advantages  of,  343,  344 

Bankruptcy    legislation,     247- 

256,  342 


Bankruptcy    proceedings,    252, 

253,  254,  265 
Barter,  10,  14 
Bill  of  exchange,  7,  8,  31,  32, 

33 
Bill  of  lading,  33,  34 
Blackstone  on  bankruptcy,  261, 

262 
Bonds,  25,  26,  50 
Book  account,   11,  21,  22,  23, 

67,  68,  69 
Book-keeping   and    credit,    99, 

119 
Bulk  sales'  laws,  357-377 

Capital,  9,  17 

Card  index  system,  174,  176 

Checks,  26,  27,  28 

Cheque  bank,  28 

Cicero,  7 

Closing    of    estates,    186,    187, 

192 
Code  of  XII  Tables,  7 
Collateral  loans,  46 
Collection  letter,  207 
Collections,  15,  200-210 
Collector,  200 
Commercial  loan,  14 
Compositions,  preventive,  254, 

337 
Confidence,  14,  15 
Connecticut    bulk    sales'    law, 

364 
Corporations,  60,  338,  339 
Courts  of  bankruptcy,  321 


379 


380 


INDEX 


Credit,  9,  10,  13,  15,  17,  18 
kinds  of,  37,  41,  58,  59 
Credit    department,    46,     132, 

200 
of  banks,  130,  131 
Credit  economy,  4 
Credit  Exchange  Bureau,  170- 

183 
Credit  information,  sources,  61, 

63,  96 
Credit  inquiry  forms,  111,164 
Credit  instrument,  19,  65 
Credit  limitations,  128-130 
Credit  man,  94-107,  160 
Credit  Men,  National  Associa- 
tion of,  225-241 
Local  Association  of,  228, 

235,  241-243 
Credit  Men's  Association,  172, 

191 
Credit  office,  108-133 
Credit  reference,  125 
Credit  report  system,  175,  176 
Credit  transactions,  13 
Creditors,  7,  84,  248-250,  305, 

326 
Crisis  of  1893,  217-218;  1837, 

281 

Dating  ahead,  70-73,  222,  223 
Debtor,    248,    249,    250,    252, 

264,  305,  322,  326 
discharge  of,  254,  286,  302, 

303,  304,  331,  350,  351 
Debts,  325 
Definitions,  19 
Dominus,  6 
Drafts,  11 

bank,  30,  31,  32 


Drafts  to  collect  accounts,  205, 
206,  207 

Economic  evolution,  4 
Economic  goods,  17 
Emperor  Leo,  7 
Europe,  9 

Fairs,  9 

Family  ledgers,  6 

Fawcett,  4 

Federal  courts,  278,  279,  296- 

298 
Floating  loans,  47 
Foreign  bills  of  exchange,  9,  11 

Greece,  Banking  systems  of,  8 

Hildebrand,  4 

Insolvent,  definition,  346 
Insolvency  law,  352,  356 
Insolvency    legislation,     State, 

345-346 
Installment  sales,  90,  91 
Insurance,  117,  118,  240 
Interest  rates,  63,  64,  79 
Inventory,  of  goods  to  be  sold, 

361 
Investment  credit,  48,  53 
Involuntary  bankrupt,  338 
Involuntary    bankruptcy,    283, 

284,  304,  318-320,  347 
Involuntary     insolvency     law, 

347-348 
Involuntary    law,     to     repeal, 
313 

Johnson,  10,  16 

Laughlin,  4,  14 
Legislation,  248,  258 


INDEX 


381 


Letters  of  credit,  29 

Levasseur,  18 

Louisiana  Bulk  sales'  law,  361 

Macleod,  4,  5 

Manufacturing  industry,  12 

Markets,  9 

Medieval  times,  9 

Medium  of  exchange,  10 

Mercantile  agency,  134-157 

Mercantile   credit,   38,   42,   51, 
54-58,  75-77,  103,  213, 
214 
and  depressions,  211-224 

Mercantile  industry,  94 

Mercantile  loans,  16 

Merchants,  9 

Michigan  Supreme  Court's  de- 
cision on  Bulk  sales' 
law,  373,  374 

Mill,  4 

Minneapolis  system,  173 

Money,  10,  16 

Money  changers,  9 

Money  economy,  4 

Mortgage  loans,  16 

Natural  economy,  4 
Negotiability,  8,  20 
New  Orleans  system,  173 
New   York   Court   of   Appeals 

decision  on  Bulk  sales' 

laws,  376,  377 
Note  broker,  66 

Ohio  Law,  366,  370 

Ohio   Supreme   Court   decision 

on     Bulk    sales'   law, 

368-372 


Oregon  Bulk    sales'    law,  362, 

363 
Over-trading,  215,  216 

Pandects,  5 

Paper  money,  47 

Personal  credit,  38,  43,  75-93 

Petitions,  340 

Preferences,    284,     285,     325, 

330 
Preferred  debts,  350 
Primitive  credit,  5 
Productive  process,  13 
Promissory  note,  11,  19 
Property  statement,  112,  127 
Public  credit,  12 

Reformed  code,  6 
Registers,  296,  297,  298,  307 
Rome,  8 

South  Carolina  Bulk  sales'  law, 

364 
Stipulation,  7 
Stock  certificates,  24 
Stock,  preferred  and  common, 

25 
Supreme    Courts    decision    on 

Bulk  sales'  law,  364 

Terms  of  credit,  62 
Torry  Bill,  327 
Traders,  259,  260,  274 
Traveling  credit  representative, 

168,  169 
Traveling  salesman,   122,   158- 

165 
Trustee,  324,  336 


382 


INDEX 


Voluntary  bankrupt,  338 
Voluntary  bankruptcy ,282,  283, 

299,  318,  347,  348 
Voluntary  insolvency  laws,  346 
Voluntary  insolvency  in  Utah, 

349 
Voluntary  law,  329 


Wage  earner,  13 

Warehouse  receipt,  35-36 

Washington's  Supreme  court 
decision  on  Bulk 
sales'  law,  374,  375 

Wealth,  17,  18 

Webster,  Daniel,  17 


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